Next time you go to USA or Europe and see someone driving a swanky Jaguar or a Land Rover (JLR), surely you can walk a little taller with the collar raised up, after all it is an Indian company, which now owns these luxury cars! Indeed, we have come a long, long way from the taboo that the “Made in India” tags had! Ex-Prime Minister of UK, Tony Blair owns a Jaguar and it is one of the few trademarks to hold Royal Warrants of Appointment from both Queen Elizabeth and Prince Charles. The Queen of England loves to ride in her Land Rover when in Scotland. India buying the most loved British brands, surely a moment of celebration!
Tata Motors clinching the deal for Jaguar and Land Rover for a whopping $2.3 billion would have surely made the world sit up and take notice. If the world had missed out looking at what India is all about when Tata Steel bought Corus, surely now, Tata Motors would have got the attention of one and all.
After the entire halo over the pride of being an Indian clears, comes the moot question – how will this affect the balance sheet of Tata Motors? The shareholders of Tata Motors are a worried lot today as they do not know whether they should cry in joy over the acquisition or shed tears of impending doom.
Tata Motors has acquired Jaguar and Land Rover (JLR) for $2.3 billion, which is actually a bargain considering that Ford had acquired these two brands for $5.23 billion in the early 2000s. Tata Motors Ltd, has signed a deal to receive a $3 billion (Rs12,180 crore) one-year bridge loan from Citigroup Inc. and JPMorgan Chase and Co. Of this $3 billion, the JLR acquisition will take away $2.3 billion and the rest is to be used to meet working capital needs and few other expenses, like maybe the cost of getting the Nano on the Indian roads.
A consortium of eight banks — State Bank of India, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, ING, Mizuho and Standard Chartered, is underwriting the bridge loan. The bridge loan has been structured in the form of step-up financing: for the first six months, the interest charge would be Libor (London Inter-Bank Offered Rate) plus 70 basis points and for the next six months, it would be 140 basis point over the benchmark rate. A special purpose vehicle is raising the bridge loan, which is 100% owned by Tata Motors.
A year later, the short-term borrowings are to be refinanced through a combination of long-term debt and equity. The company is looking at a debt equity ratio of 1:1. So this means that of the Rs.12,180 crore being raised, Rs.6090 crore is to come via debt and another Rs.6090 crore via liquidation of investments and issue of fresh shares.
First the debt part. On the Rs.6090 crore, assuming an interest rate of 6%, we are looking at an interest burden of Rs.365 crore per annum. So we now have to realize that about over Rs.400 crore of the bottomline will be additionally eaten away by the interest burden.
Now for the equity part. The company is also contemplating selling a slice of its holdings in its group companies to raise the amount. A look at the balance sheet of Tata Motors was a real eye opener. Instead of finding a string of investments, the company has only two major investments to talk about which on liquidation will give it money. One is the holding in Tata Steel. It holds 2.58 crore shares of Tata Steel. Currently quoted at Rs.655, if Tata Motors decides to sell off its entire holding in Tata Steel, it will be able to raise Rs.1690 crore, as of today. In unquoted, the company has 66.67 lakh shares of Tata Industries, which promotes the Group's entry into new and high-tech areas. If Tata Motors decides to sell its stake in this company which has face value of Rs.100 per share, at Rs.1000 per share, then it will be able to raise Rs.660 crore. So these two companies together, will be able to raise around Rs.2500 crore, which is over 40% of the total money to be raised via equity route. For the rest, the company will be able to raise another Rs.1500 crore via preferential allotment to Tata Sons and for the balance, it might come out with a rights issue. Now these are the plausible methods of raising the equity and might also prove to be the best.
It may be recalled that Tata Steel had sold 85 lakh shares in TCS at an average rate of Rs.1,082 per share, managing to raise Rs.920 crore to refinance a part of the Corus deal.
There is no doubt that Tata Motors has a huge responsibility now. It has taken over two of the biggest luxury brands of the world but both of them have had dwindling sales and a red balance sheet. It is now upto Tata Motors to turn it around. The balance sheet of Tata Motors of next fiscal will reflect the consolidated figures of JLR and their losses if they keep mounting, might be meager in the developed country parlance but would be enough to drown the company in a quagmire of losses.
Tata Motors also has the responsibility of ensuring that it is able to show profits on its Nano project and this too will require some more amount of investment.
Till now the shareholders of Tata Motors had to worry only about the Nano but now, they have to worry about the performance of Jaguar and Land Rover. It should not happen that this current moment of pride turns into a sore wound. The next two years will undoubtedly be painful, years of integration. Till then, the shareholders can take pride of being owners of the company, which owns JLR, so what if they don’t actually drive a Jaguar to home!
By Ruma Dubey
Source: sptulsian.com
