Tata Motors' Reversal of Fortune
What a difference a year makes. Just last January, Tata Motors (TTM) was on top of the world. It had sewn up a $2.3 billion purchase of the Jaguar and Land Rover brands, had just unveiled the intensely popular Nano—the world's cheapest car—and its shares, along with India's stock market, were soaring.
But on Friday evening, Jan. 30, at the stately Mumbai headquarters of India's sprawling Tata Group, the bad news just kept coming: quarterly losses of $54 million, the first in more than seven years; a nearly one-third drop in revenues on a quarter-over-quarter basis; no solid date for the mass launch of the Nano, which has been delayed by several months after the company was forced to change production sites; and no clarity on how the company intends to pay back the billions of dollars in bridge loans it took out to pay for Jaguar/Land Rover. In spite of the gloomy results, the company struck a hopeful note. "We are seeing an upturn in consumer demand," says Ravi Kant, the CEO of Tata Motors. "[We are] more hopeful this quarter."
The rapid reversals at Tata, which is probably the most internationally visible of Indian automakers, mirror the suddenness with which many Indian companies have seen their fortunes change as global lines of credit have frozen and the local economy has slowed down. Exports are dropping for the first time in nearly a decade. Interest rates have remained high to help control runaway inflation, which for a while last year crossed 12% before stabilizing to just under half that figure. "It's not just Tata; it's the entire sector, even though this is particularly bad timing for them, since they have so much looming debt," says one auto analyst, who asked not to be named because of company policy. "Unless interest rates come down, and salaried professionals feel more secure about their jobs, it's really not likely that car sales are going to go up."
Bad Timing for Tata
In effect, the rules of the game changed just while Tata Motors was set to hit a home run. The No. 3 carmaker in the world's second-fastest-growing car market saw its revenues sag, then go into free fall, as Indians delayed car purchases in a bad economy. Tata Motors had expected blockbuster sales for the Nano, which was to have launched around October 2008. But protests over the way a local government acquired land from farmers before leasing it to Tata forced the company to shut down and move a nearly completed $350 million factory across the country. "Dismantling is a complex problem with moving suppliers, etc.," says Kant. "But there are some interim arrangements to produce the Nano in small numbers to whet the appetite but not satisfy the hunger."
At the same time, India's manufacturing sector has slowed down because of tight credit, and Tata's commercial vehicle sales (where the company owns nearly 60% of the world's fifth-largest commercial vehicle market) have dropped precipitously. And the bills for the purchase of Jaguar/Land Rover, completed when the global economy was gorging on easy credit, came due just as that credit vanished, leaving the company struggling to convert expensive bridge loans into cheaper long-term commitments.
For those looking for a silver lining, though, there's been some good news this week. On Wednesday, the company bagged a $450 million, 12-year contract to build and maintain buses for the city of New Delhi, which is in the midst of upgrading its infrastructure. That should come as a shot in the arm for Tata Motors, which sold nearly 40% fewer commercial vehicles this quarter than the comparable quarter a year ago.
And for its Jaguar/Land Rover subsidiary, which declares results separately and is believed to have been profitable last year, there was hope in Tuesday's announcement by the British government that it would guarantee $1.9 billion in loans from the European Investment Bank for car manufacturers and another $1.4 billion in other lending. Tata Motors, which took out expensive bridge loans to pay for the Jaguar/Land Rover purchase, has had trouble raising money to pay those loans back, but it is still unclear if it can use those EIB credit facilities to pay back the bridge loan. "Of course, we plan to apply for as much help as we can get under that program, but the indication we've gotten from the [government officials] there is that the loans are intended to help keep production lines running, not directly pay off accumulated debt," says an official at the company's finance department, who asked not to be named because he was not authorized to speak to the media.
After an undersubscribed rights issue, Tata has sold millions of dollars of commercial paper at interest rates as high as 11%, according to data collected by Thomson Reuters (TRI), making it the second-largest seller of commercial paper in India. In December, to raise cash to pay back loans that were coming due in the first half of 2009, the company even took cash deposits from investors and others, offering an 11% return on the investment, raising a little over $60 million. With the money from the rights issues, the company has paid down about $1 billion in debt, says Kant. "We are still in talks with the banks," he says. "We are in an upturn, and the cycle will begin to correct itself."
Of all of India's companies, Tata Motors is perhaps the least likely to be swamped by these problems. Part of a well-capitalized group, the company has options others don't, including assistance from its parent company, the Tata Group. As India's economy recovers, car sales will revive and so will commercial vehicle sales, which already saw an uptick in the last month, according to data from the Society of Indian Automobile Manufacturers. Tata Motors' stock, down 52% this past quarter and now trading well below book value, is seen as a good long-term bet. It is already inching up this week, up as much as 5% when the British loan guarantees were announced.