Year 2010 has been a welcome change for Tata Motors shareholders after a miserable 2008. With the revival of the global economy and the markets, the stock has also recovered. But what has played a fundamental part in the stock's revival is the restructuring of the company, whose results are beginning to show up now.
In times of revival, the auto sector generally outperforms the market on account of lower input costs, faster revival in consumer demand, and low-base affect. Moreover, the fiscal stimuli given last year to help revive the economy, JNNURM (which led to greater demand for city buses) and acceptance of the Sixth Pay Commission proposals all boosted demand within the auto sector. The impact of these measures is now visible in the improved bottomlines of companies like Tata Motors.
Turnaround at JLR
The event that sparked off the recovery in Tata Motors' stock was the announcement of its Q3FY10 result at the end of February 2010. The company revealed that Jaguar Land Rover (JLR) had finally turned profitable.
JLR's quicker-than-expected turnaround is crucial for its parent since the former contributes 60 per cent of consolidated revenue. JLR posted a net profit of around Rs 20 crore in the financial year 2010. It has been in the green for the last two quarters now.
Tata Motors' consolidated net profit for FY10 stood at Rs 2,571 crore. This is in sharp contrast to one year ago when it posted a net loss of Rs 2,505 crore. Tata Motors has also revamped its top management with the appointment of Carl-Peter Forster, former boss of GM Europe.
Lowering debt
At the end of FY09, Tata Motors' debt stood at Rs 23,750 crore. In its efforts to reduce the bulging debt burden, the management announced in March 2010 that it would sell 20 per cent stake in Telecon to Hitachi for Rs 1,160 crore.
Further, at the beginning of the year Tata Motors converted its foreign debt (zero per cent ¥11.8 billion Japanese bonds and $300 million convertible bonds) into equity. This led to 5.5 per cent dilution of equity from the December 2009 base of 47.9 crore shares. This conversion was to the tune of Rs 1,600 crore (US$345m).
These are small but significant steps in the positive direction. At the end of March 2010, the company's net debt stood at Rs 18,800 crore. According to a note from Daiwa Securities, Tata Motors' automotive debt-equity ratio (i.e., without the auto finance business) will decline from 4 at the end of FY09 to 0.9 by FY12E.
According to Ashish Kapur, chief executive officer of New Delhi-based Invest Shoppe India, “Tata Motors' efforts to reduce the leverage on its balance sheet bode well for the stock in the near future. The improved sentiments for its JLR venture subsequent to its breaking even sooner than expected also contributed to building up investors' interest.”
MFs' thumbs up
In April 2010, domestic mutual funds gave a big thumbs up to Tata Motors' efforts by doubling their exposure to the stock. Buying activity of leading fund houses like HDFC Mutual Fund (Rs 430 crore) and UTI Mutual Fund (Rs 150 crore) doubled the exposure of mutual funds in the stock from Rs 809 crore (at the beginning of April 2010) to Rs 1,789 crore (end of April 2010).
Even though foreign institutional investors (FIIs) have been buying the stock since July 2009, domestic institutions like mutual funds did not take the leap of faith and maintained their holding at around 2.28 per cent of total shareholding between July 2009 and March 2010. The funds' April purchases certainly support Kapur's viewpoint that “the worst is over for Tata Motors”.
However, Kapur adds a note of caution. “While robust domestic growth has already been reflected in the monthly volume figures, the international business remains a cause for concern,” he says.
For retail investors Kapur urges caution since Tata Motors remains a volatile stock. At the same time, he believes that any positive surprise from the international segment can provide a fillip to the stock. For investors with a good risk appetite this stock remains a good investment idea, more so since it has corrected almost 15 per cent (till May 25, 2010) since the beginning of the year.
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