Tata's Jaguar Deal Worries Analysts

What looks to be the biggest-ever deal by an Indian company, may not be the smartest. Analysts point to low share prices and brand mismatch

Tata Motors' acquisition of the two iconic brands—Jaguar and Land Rover—without doubt ranks among the high-profile global deals clinched by Indian firms so far. But if auto analysts are to be believed, this may not be the best time to buy Tata Motors shares. At the time of going to press, Tata Motors' ADRs were trading 2.30% lower on the NYSE Euronext at $16.96. It had hit a low of $14.71 on March 17, 2008. Meanwhile, Ford Motors was trading at $2.35, down 2.08%.

The overwhelming consensus is that the acquisition will strain the company's bottom line near term, thus putting pressure on the stock price. According to Enam Securities' auto analyst Sahil Kedia, "There is a likelihood that there will be pressure on the profit after tax in the short term" as it is still "slightly unclear how Tata will fund the acquisition". He feels that the Indian company might also use a "certain amount of loan receivables on its books" to fund the acquisition.

In a similar context, HDFC Securities' executive director and head (institutional business) Sanju Verma says "The success of the deal rests on the Tatas' ability to effectively manage apparent brand positioning mismatches". She also expects "EPS dilution could be around 10% plus though earnings may be impacted by a sharper 40-45%, after taking into account the financing costs and losses attributed to both brands". She is assuming that the JLR deal is pegged at $2 billion and Tata Motors applies a funding mix of internal accruals, equity and debt.

Analysts also say much depends on how Tata Motors will be able to boost the flagging sales of both loss-making brands. According to reports, Jaguar sales dropped 33% in the US and Europe in the first two months of the current year. Land Rover sales fell 13% in the US and around 7.7% in Europe during the same period.

Auto analyst Piyush Parag of Religare Enterprise has a "buy recommendation pre-deal" as the "valuations seem extremely attractive at current levels". However, the brokerage will update its recommendation post Tata-Jaguar Land Rover deal as "presently, it will be too early to comment on the valuations, as the financial details of the deal are yet to come."

Interestingly, while analysts are expecting selling pressure on Tata Motors shares in the coming days, fund managers started reducing their exposures around six months ago. Data clearly shows that in the past six months, mutual funds have brought down their exposure by a little over 30%. In September 2007, MFs were holding nearly 4.50 crore shares of Tata Motors, which has come down to around three crore in February.

On Wednesday, the stock lost marginal ground to close at Rs 679.40. Since January 3, when news of the deal first became public, the stock has lost more than 14%. However, the benchmark Sensex, in the same period, has shed nearly 21%.

Meanwhile, ICICI Direct's senior analyst Pankaj Pandey feels that the "recent equity market turmoil has already taken a toll on the stock and so further downside from current levels should not be expected".

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