Tata Motors Risk Rises as Slym Death Clouds Plans: India CreditSiddharth Philip and Anurag Joshi
Bond risk for Tata Motors Ltd. is climbing at the fastest pace in more than two years as the sudden death of the head of its India operations threatens efforts to reclaim market share.
The cost for insuring the debt of the owner of Jaguar Land Rover against non-payment for five years jumped 69 basis points last month to 509, the biggest monthly increase since September 2011, according to data provider CMA. Credit-default swaps on Ford Motor Co. rose three basis points to 118.
The suspected suicide of Managing Director Karl Slym, hired in 2012 for reviving the popularity of the world’s cheapest car, the Nano, may hurt Tata Motors’ plans to boost local sales that fell 37 percent in the last nine months. Investor confidence is flagging as the Society of Indian Automobile Manufacturers says industry deliveries are set for the first annual drop in more than a decade amid rising interest rates and an economic slump.
“Slym was trying to turn around the local business of Tata Motors, especially the passenger car side,” Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which oversees about $1.1 billion in emerging-market assets, said in a Jan. 30 interview. “It will take another three to five years to revive the passenger car business, and will require the development of new models that have good quality and that can compete against Maruti Suzuki and Hyundai.”
Slym was found dead on Jan. 26, having fallen out of a small window from his suite on the 22nd floor of the Shangri-La hotel in Bangkok, according to police. Thai officials said last week that preliminary evidence indicated that the 51-year-old executive, who was in the country to attend a board meeting of the company’s Thai unit, committed suicide. Tata Motors hired Slym, a 17-year veteran at General Motors Co., in 2012 after his predecessor, Carl-Peter Forster, resigned in September 2011.
Tata Motors said in an e-mailed response to questions that bond risk has climbed for a number of Indian companies, probably because global developments are hurting confidence in emerging-market assets.
“It is a big loss to fill, but I don’t expect it to be a problem for Tata to bring in a suitable replacement,” said Jigar A. Shah, an analyst at Maybank Kim Eng in Mumbai. “The domestic business is in trouble because of the economy, and the company needs to focus on building new products to meet rising competition.”
The decline in Tata Motors’ domestic sales during the first nine months of the year ending March 31 was the biggest among 17 automakers. Nano deliveries plunged 72 percent. Demand for cars is flagging after Asia’s third-largest economy grew 4.5 percent last fiscal year in the smallest gain in a decade.
India’s car manufacturers are counting on the biennial New Delhi Auto Expo this week for a turning point as they seek to revive demand with their latest vehicle models.
While Tata Motors was seeing a recovery in overall earnings -- profit surged 71 percent in the three months ended September and analysts estimate net income doubled last quarter -- they were driven by the Jaguar Land Rover operations. Its India business that was headed by Slym posted a loss during the latest fiscal half. Tata Motors is the automotive arm of the Tata Sons Ltd. group, a business empire headed by Cyrus P. Mistry that includes more than 100 companies in industries ranging from steel to call centers and chemicals.
Jaguar Land Rover’s total worldwide sales rose 19 percent last year to a record 425,006 vehicles, driven by demand from China and other Asia-Pacific countries, according to a company statement last month. Jaguar Land Rover accounted for 72 percent of group revenue and 88 percent of operating profit for the year ended March 31.
Analysts estimate total profit will rise 40 percent this fiscal year, based on the average estimate compiled by Bloomberg, because of earnings from the Jaguar Land Rover business that’s headed by Ralf Speth. Tata Motors bought JLR from Ford Motor Co. in 2008 for more than $2 billion.
“In the short-term, there can be an increase in Tata Motors’ borrowing costs, though in the medium-term, the impact may not be much because most of the company’s profits are coming from Jaguar Land Rover,” Hemant Dharnidharka, the Bangalore-based head of credit research at SJS Markets, said in a telephone interview on Jan. 31. “Yields on the company’s dollar bonds are reasonably low and even an immediate spike in interest rates shouldn’t impact the company’s funding plans.”
Five-year credit-default swaps on Tata Motors touched an 18-month high of 496 basis points on Jan. 27, a day after Slym’s death, CMA prices show. The yield on the company’s 4.25 percent Singapore dollar notes due May 2018 is headed for the first monthly increase since August, data compiled by Bloomberg show. The company’s shares lost 5.6 percent last week, the biggest five-day drop since March 2013, in Mumbai trading.
The Indian automaker is now raising $500 million in overseas loans. Korea Development Bank and BDO Unibank Inc. of the Philippines joined the loan syndication, a person familiar with the matter, who asked not to be identified because the details are private, said last week.
Indian companies raised $36.7 billion in foreign-currency loans and bond sales in the year ended Jan. 31, 20 percent more than a year earlier, as borrowing costs at home remained relatively higher. Reserve Bank of India Governor Raghuram Rajan unexpectedly raised the benchmark repurchase rate to 8 percent from 7.75 percent on Jan. 28 to counter inflation.
Top-rated five-year rupee company notes pay 9.75 percent, data compiled by Bloomberg show. The average yield on Indian dollar debt is 5.54 percent, according to JPMorgan Chase & Co. data. Ten-year sovereign securities in India pay 8.74 percent, versus 2.65 percent in the U.S. and 4.46 percent in China. The rupee fell 1.4 percent last month to 62.6575 per dollar.
Sales at Jaguar Land Rover may slow as an economic slowdown in China damps demand for luxury vehicles, adding obstacles to efforts at Tata Motors to revive profitability, according to Basudeb Banerjee, an analyst at Quant Broking Ltd. in Mumbai. The world’s second-largest economy expanded 7.7 percent in the fourth quarter of 2013, compared with the 7.8 percent in the preceding period, according to official figures.
“There are concerns about China, given that China is Jaguar Land Rover’s biggest market,” Banerjee said. “That is probably weighing down the CDS of Tata Motors.”