Tata group's struggle with liquidity continues

Tata group is trying hard to raise more than Rs 15,000 crore to support its cash requirements. This is in addition to Rs 13,070 crore it has obtained from the sale of 26% equity stake in Tata Teleservices to NTT DoCoMo. According to news reports, Tata group has plans to obtain these funds by the sale of vehicle loan portfolio of Tata Motors, selected private equity placement, and through the public offer of debt securities.

Notably, Tata Group had taken INR 9,200 crore bridge loan in June 2008 to finance the purchase UK’s Jaguar and Land Rover (JLR) brands of luxury cars from Ford. While that loan is required to be paid by June 2009, Tata Motors will further need to invest more than hundred crore rupees into JLR to save it from going illiquid. JLR has sought financial assistance from the UK government to the order of 1 billion pound as it is facing credit crisis due to sharp fall in sales. The UK government is in still pondering whether to use taxpayer money to bail out JLR.

As an outcome of the JLR deal, Tata Motors outlook may be degraded to negative by rating agencies which will further put pressure on the company to raise cash from the market.

Tata group is planning to fulfil this cash requirement by following ways:

1. Rights Issue: Rs. 4,200 crores

2. Sale of stake: Rs. 3,000 crores
It had raised Rs. 545 crore through through two major sales: Rs. 485 crore by selling TATA Steel stake, stake in TATA Teleservices of around INR 60 crore.

3. Foreign Equity Offer: $ 500 million (Rs. 2,400 crores)
This might be a hard option to pursue in the current market conditions.

4. Public Debt Offer: Rs. 2700 crores
In November 28 2008, Tata Motors has gone to the public with a fixed deposit scheme offering as much as 12.83% to general public. According to the Companies Rules, Tata Motors can raise a maximum of Rs. 772 crore from its shareholders and another Rs. 1931 crores from the general public through the fixed deposit scheme. The last time Tata Motors went for public borrowings was in the year 1995 when it received good support. However in the current situation it might be difficult if not impossible for Tata Motors to raise the maximum possible amount from public.

5. Sale of vehicle loan portfolio of Tata Motors: About Rs. 8,000 crores
The vehicle loan pool of Tata Motors is about Rs. 8,000 crores.

About Tata Motors
Tata Motors Limited is India’s largest automobile company. In FY08 it reported revenues of Rs. 35651 crores (USD 8.8 billion). It is the leader in each segment of commercial vehicles in India. Also, it is among the top three players in the car & utility vehicle market. On global scale, it is world’s fourth largest truck and second largest bus manufacturer. Though it is a part of India’s biggest business group, Tata group, it gained world’s attention last year with its announcement of buying Jaguar and Land Rover from Ford. Also it came into limelight with the proposal of manufacturing world cheapest car: Tata Nano, popularised as ‘The people’s car’.

Tata Motors takes retail debt route for raising funds

Tata Motors has been trying to raise funds by offering debt securities to retail investors. The public offering of debt securities if successful will reduce some liquidity problems which the company is facing because of the Jaguar Land Rover.

Tata Motors has appointed Tata Securities, Kotak Securities, and JM Financial as the authorised brokers for this offer know as "Tata Motors Fixed Deposit Scheme". A retail investor will require to deposit a minimum amount of Rs 20,000 (and thereby in multiples of Rs 10,000) to participate in the scheme. The deposits for 1 year carry an interest rate of 10% p.a. For 2 years the interest rate is 10.50% p.a. and for 3 years it is 11.00% p.a. The income tax will be deducted at source from the amount of interest payable to the depositor in accordance with the provisions of the Income Tax Act, 1961 if it exceeds Rs.5,000 in a financial year.

Tata Motors has long term credit rating of AA+ and AAA for its debt instruments. It has made profits after tax of over 2000 crores in FY08.

	(Rs. in crores)
Year	Profit before tax	Profit after tax
2007-08	2,576	2,029
2006-07	2,573	1,913
2005-06	2,053	1,529

Moreover, its leverage ratio is also not high. However, its debt/equity ratio has increased from 0.44 in FY04 to 0.7 in FY08. Still, Tata Motors has enough profits to easily service its debt. Its interest coverage ratio was 7.0 in FY08.

Balance Sheet (Rs. in crores)
	As at	As at
Liabilities	31.03.08	31.03.07
Share Capital	386	385
Reserves & Surplus	7,454	6,484
Secured Loans	2,462	2,022
Unsecured Loans	3,819	1,987
Deferred Tax Liabilities	976	787
Current Liabilities
& Provision	10,657	7,728
Total	25,752	19,394

	As at	As at
Assets	31.03.08	31.03.07
Fixed Assets and
intangible Assets (Net)	10452	6395
Investments	4910	2477
Current Assets, Loans
and Advances	10384	10512
Misc. Expenditure	6	10
Total	25752	19394

Though Tata Motors has strong fundamentals, the macroeconomic situation is adverse and its acquisition of JLR is adding extra burden on its performance. However, with a strong balance sheet and backup of the biggest group of India Tata Motors should be able to wither off these concerns and emerge out of this crisis.

This however doesn't eliminate the risk that in near future it may see its credit rating getting downgraded. Hence, the question: is the spread between interest rates offered in the scheme and risk free rate adequate enough to compensate for the risk. It is more favorable to Tata Motors as it has a very strong brand reputation and the risk free rates are on downward movement thereby increasing the spread and making the scheme a very attractive investment option.

Retail debt market in India

The top Indian stock exchanges, BSE and NSE, offer trading in debt instruments for retail investors. The Retail trading in Debt Market was started in January 2003. All investors who have equity broking account can trade in the Retail Debt Market. The debt instruments available for trading are government securities (G-Secs or Gilts). Government securities are issued by government and have no default risk (sovereign bonds). Government issues these securities through auction to major players like banks and other financial institutions. After that trading on these securities occur in secondary market. Government pays coupons (equivalent to annual interest) on these securities to its holder. G-secs are characterized by the coupon rate (usually expressed annually) and maturity (the time after which the securities can be redeemed). The returns from a G-Sec are the coupon payment every six months (half the annual coupon rate) and the face value payment at the maturity.

G-sec are a cost-effective way of raising long term money for government and it is a long term secure investment for investors. It has the lowest risk and the coupons provide regular stream of money. Unlike fixed deposits an investor can liquidate these securities in the secondary market depending on liquidity requirements. It has the lowest risk and the coupons provide regular stream of money. Unlike fixed deposits an investor can liquidate these securities in the secondary market depending on liquidity requirements.

There is tax benefit associated with the G-sec investment. Apart from having no tax deduction at source, G-sec offer tax rebate of Rs 3000 under Sec 80L of IT act.

About government securities

Face value = Rs. 100
Minimum size = 10 units
Credit Risk = NIL

Coupon rate = total interest paid by the government to the G-Sec holder.
This coupon amount in paid in two equal instalments (half of coupon rate every six months)

Maturity = the date till which the G-sec is issued for. At maturity government pays back the amount equal to the face value of the security.

Accrued Interest rates
Since government securities pay interest at fixed interval of 6 months, anyone buying G-sec from secondary market is entitled to the partial interest payment depending on when he buys the security. For example, if an investor buys G-sec which has its coupon due after next 4 months, he/she will have to pay to the seller the interest for 2 months in addition to the market price. This is also called the interest accrued. In NSE and BSE trading systems, the accrued interest is added to the price of the G-sec while entering the quote on the system.

Dirty Price and Clean Price
The price of G-sec without the accrued interest is known as Clean price while Dirty price includes the accrued interest.
Dirty Price = Clean Price + Accrued Interest

Valuation of G-Secs
The price of G-sec is relatively easier to obtain than the price of an equity. The cash flow in the case of G-Sec are known with certainty. The only debatable factor is the discount rate at which these cash flows will be factored since they will be available at a future period. Knowing it, one can easily discount the cash flow streams with their respective discount rates to bring down their present value. The discount rate is all that creates some uncertainity and involves different parties trading actively to make profit.
Working reversely since the price of a market traded G-Sec is available one can find the effective discount rate which the market is assuming. This rate is termed as yield-to-maturity.

Premium and Discount
The face value of a G-Sec is Rs 100 but it can trade anything above or below 100. When it is trading above 100 it is said to be trading at premium and on the other side when it is trading below 100 it is said to be trading at discount.
Generally the premium and the discount for a G-Sec depends on its coupon rate and prevailing discount rate. A G-Sec having coupon rate more than the current discount rate is likely to trade above Rs 100 and hence at premium to its face value.


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