Tata Motors: Long way to go
Business Standard — March 27, 2008

The benefits of the Jaguar and Land Rover buys will be seen only in the long run.

The Street has not been too keen on truck and car maker Tata Motors wanting to acquire the businesses of the Jaguar and Land Rover.

That’s essentially because they don’t make a whole lot of money — the premier automotive group which includes Jaguar, Land Rover, Volvo and the Aston Martin — posted pre-tax results of a negative $1.9 billion in 2007 on revenues of approximately $33 billion.

The Rs 32,371 crore Tata Motors is paying a hefty $2.3 billion for what are undoubtedly marquee brands and complementary to the Tata range of passenger vehicles.

But, over time, it will need to spend more to sustain the businesses and it won’t be easy to turn them around. Even Ford has had a difficult time running the businesses in which the unions have a big say and hasn’t succeeded.

More than the Land Rover, which is actually a good buy, it is the Jaguar, it is understood is a drag on the finances. It’s also hard to see the benefits of the technology seeping through to Tata Motors in a hurry though the company will own the IPR.

Given that the deal with Fiat will give access to some good technology for its passenger cars,especially the diesel models,Tata Motors need not really have bought the Jaguar and Land Rover at this juncture.

The deal will strain Tata Motors’ balance sheet which is leveraged at about 1.4 times. The $3 billion loan to fund the deal will mean higher interest costs: borrowings at the end of March 2007 were around Rs 9,900 crore which includes unconverted foreign currency bonds.

Even if the company unlocks value from sales of stakes in subsidiaries, Tata Motors gearing stands to increase. The company spends around Rs 3,500 crore annually on capital expenditure and it is expected to earn cash flows of about Rs 3,200 crore in FY08 and Rs 3,700 crore in FY09.

The stock has been a huge underperformer over the past year mainly because the commercial vehicles industry is in a slump and cars aren’t selling too well either. Tata Motors is expected to close FY08 with consolidated revenues of Rs 35,400 crore and a net profit of close to Rs 2,400 crore.

The stock has historically attracted a discounting of between 14-20 times. At the current price of Rs 679, it trades at 13 times forward earnings and should continue to underperform given that the economy too seems to be slowing down.

Steelmakers: Local sales won’t hurt
Steelmakers like the Rs 34,488 crore SAIL and the Rs 9, 297 crore JSW Steel have agreed to restrict exports.

That should hardly impact their numbers because demand at home remains strong--steel imports were about 4.6 million tonnes in the first nine months of FY08.

Moreover, it’s only mainly voluntary spot sales, or anything that is not contractual that is being discontinued and these account for small portion of total exports. While operating margins, which range between 32-40 per cent, may not fall, they won’t expand either.

That’s because exports can be more profitable: they serve as a natural hedge against imports, often bring in long-term contracts and work well when the exchange rate is in favour of exporters. More worrying for steelmakers now is the high cost of iron ore and coking coal.

SAIL’s exports account for barely 3 per cent of its annual output of 14 million tonnes.The stock, which has fallen 29 per cent since the start of the year, is currently priced at Rs 200 and trades at 9 times estimated FY09 earnings.

JSW ‘s exports account for about a third of sales and, of this, spot contracts account for about 15-20 per cent.

However, the higher input costs could pressure margins of JSW; as such at the current price of Rs 836, the stock trades at a lower multiple of 7 times forward.

Since the start of the year the stock has lost nearly 37 per cent and could remain an underperformer.

Tata Steel, which is not part of the arrangement with the government, has its own problems with Corus.

At Rs 657, the stock trades at about 5 times forward earnings and could be an underperformer.