Tata Motors to raise Rs 4,400 crores via NCDs this fiscal

Auto major Tata Motors has proposed to raise Rs 4,400 crores from Non-Convertible
Debentures (NCDs) during the current fiscal to meet its expansion plan.
Mode of raising funds for expansion Non convertible debenture.
Funds planned for expansion Rs 4400 crores.
Tenors ranging from 2 to 10 years. (Tenor - The amount of time left for the
repayment of a loan or contract or the initial term length of a loan. Tenor can be
expressed in years, months or days
Coupon rate 9.70+0.5 percent
"It is proposed to issue NCDs on a private placement basis aggregating up to Rs 4,400
crore, in one or more series/tranches during the 12 months with an intention to
substitute the short term liabilities/borrowings and for financing, part of the ongoing
capital expenditure during the next 12 months as also for general corporate purposes,"
Tata Motors said in its annual report.
In continuation of its efforts to strengthen its capital structure, the company intends to
augment the long term resources by substituting part of the short-term liabilities with
medium to long term resources, it said.
The company intends to raise NCDs for a tenors ranging between 2 to 10 years and
expects the coupon rate of NCDs to be lower than the SBI base rate currently at 9.70
percent plus 0.5 percent, considering the current credit rating, it said.
Purpose

To substitute the short term liabilities/borrowings

For financing, part of the ongoing capital expenditure
To strengthen its capital structure
For general corporate purposes

ANALYSIS OF EXPANSION PLAN

Here by looking at the purpose of raising the debt fund by the company, the present
financial position, I am going to understand the possible impact of the fund raised by the
company. Before looking at how the firms financial, operating or investment position is
affected, lets look at the companys view of future growth prospectus from its annual
report.
The global economy going forward is expected to witness strong growth in certain key
economies, but pace of growth is likely to remain uncertain in regions like Europe,
Russia, china, LATAM etc.

In India inflation, lower interest rates and lowering energy prices will continue to drive
consumer confidence. The governments focus on infrastructure investment, ease of
doing business and make in India are efforts in the right direction for boosting
investments in the country. Operationalizing the vision into realty will be key to future
growth of the economy and the Indian automobile industry as well.
The company is consistently and strongly investing in products and technologies that
would make it future ready and would also fuel international growth.
Key points
Demand is linked to economic growth and rise in income levels. Per capita penetration
at around nine cars per thousand people is among the lowest in the world (including
other developing economies like Pakistan in segments like cars).
As compared to their global counterparts, both the two-wheeler as well as four wheeler
segments are relatively lesser fragmented. However, things have changed, especially
on the passenger cars front as many foreign majors have entered the Indian market. As
a result, pricing power is likely to diminish going forward.
Automobile majors increase profitability by selling more units. As number of units sold
increases, average cost of selling an incremental unit comes down. This is because the
industry has a high fixed cost component. This is the key reason why operating
efficiency through increased localization of components and maximizing output per
employee is of significance.
Largely cyclical in nature and dependent upon economic growth and per capita income.
Seasonality is also a vital factor.
Ratios
Liquidity and solvency
DEBT-EQUITY RATIO Total liabilities/ shareholders equity = 1.35
The company has high debt equity ratio compared to the previous years. A higher debtto-equity ratio typically shows that a company has been aggressive in financing its
growth with debt, and there may be a greater potential for financial distress if earnings
do not exceed the cost of borrowed funds.
But the interesting part here is that the company is raising the current money in the form
of NCDs to pay off the previous debt i.e. clearing current debts by taking long term
debts with tenors of 2 to 10 years. By this the companys debt equity ratio will continue
to remain high, however it help it improve its current liquidity position. So lets look at
how the liquidity position of the company would be affected.

CURRENT RATIO 0.42

The company has been able to maintain a current ratio between 0.40-0.50 for the last
five years, which is at par when compared to the industry average and other major
players in the similar segment. A reduction in the current liabilities would further make
the companys current ratio to improve.
INTEREST COVERAGE RATIO (-1.22)
The company has not been able to pay off its debt from the profits it has earned in this
financial year. The ICR ratio has changed significantly from 0.63 in 2014 to -1.22 in
2015 which indicated the debt that was raised by the company to meet capital
expenditure has increased its interest component but it would take time to generate
returns.
Profitability ratios
The company has negative profit margin ratios for the last few years.
Operating Profit Margin(%)
Profit Before Interest And Tax Margin(%)
Gross Profit Margin(%)
Cash Profit Margin(%)
Net Profit Margin(%)

-3.40

-2.65

-10.06

-7.82

-10.58

-8.69

-4.53

7.72

-13.05

0.97

Due to the losses that the company made in the year 2014-2015 it has not been able to
pay dividends to its stake holders.
Valuations
P/E ratio
Negative EPS numbers are usually reported as "not applicable" for years in which a
company reported a loss. Investors buying a company with a negative P/E should be aware
that they are buying a share of a company that has been losing money per share of its
stock.
Market Price
P/BV
P/E

2015
556

2014
405

2013
255

12.06074
-37.7717

6.805579
389.4231

4.256385
268.4211

P/BV CMP
Tata motors

book value

332
1252.
7

46.1

14.4

Force Motors

95
2637.
8

930.48

Eicher Motors

20482

455.14

SML Isuzu
Ashok Leyland

191

P/BV
7.2017
35
6.5586
39
6.5972
22
2.8348
81
45.001
54

Recommendation
After looking at the company from fundamental analyst perspective I would not
recommend my client to invest in the company after the expansion plan as the debt of
the company will be too high, which means it is too risky for the equity investors. The
company is not profitable and has not been able to pay the interest on its debts from its
profits, no dividends were declared this year and the earning per has also been
negative or nil. So it would not be the right time to invest here as there is very little
chance of dividends being declared and also the capital appreciation by share price
upward movements are not supported by the fundamental factors.