Tata Motors: Going full throttle and gaining mileage
Putting on a youthful look
Tata Motors is getting younger as it gets older. At 65, the company is firing on all cylinders and it is also slowly extricating itself from a difficult funds flow scenario that it got sucked into following the mega acquisition of Jaguar Land Rover. The management badly mucked up the husbanding of its resources during this frenetic pace of activity. Consider the following stats. Gross turnover including other income grew from Rs 243 bn in FY06 to Rs 402 bn by FY10, while the gross block grew in proportion from Rs 89 bn to Rs 236 bn over the same period. Pre-tax profits however took a beating, growing marginally from Rs 20.5 bn to Rs 28.3 bn over this period, after undergoing a sharp fall to Rs 10 bn in the interim. With improper funds flow management inspite of its rising stature, the company sought to resolve the problem through a furious issue of additional debt capital which in turn ballooned from Rs 29 bn to Rs 166 bn. With a substantially higher gross block and debt capital to service and the consequent ballooning of depreciation and interest charges, it created a severe dent in the bottom-line. The nub of the issue is that the paid up equity capital over this period grew only marginally from Rs 3.8 bn to Rs 5.7 bn. The issue of additional capital was affected at a substantial premium to the face value.This however in turn helped limit the growth in floating stock.
Both the company and the consolidated entity were growing at such a frenetic pace, that the rather perturbed management had to also implement a neat defensive strategy in 2008 to keep itself firmly in the rider's saddle. It issued a new series of equity shares called 'A' Ordinary shares with differential voting rights, but which shares also have to contend with a differential dividend payment. In this brave new world the promoters control 37% of the voting power of the outstanding equity of 506 m 'ordinary' shares of Rs 10 each, and 52.9% of the voting power of the outstanding equity of 64.2 m 'A' ordinary shares of Rs 10 each. This issue of capital was the game changer. (The company must thank its lucky stars that the government came around to allowing such forward looking capital instruments at precisely the time that it found itself staring into a black hole.)
Overdependence on debt
The fact of the matter is that given its present scale of operation, the company is even today undercapitalised - in terms of permanent capital, and over geared in terms of borrowed capital. The point is also that the working capital management is under strain. This is a bane of promoter management controlled corporations who are keen on keeping a controlling stake in their companies to ward off marauders. Thus any sharp increase in the operational base of their wards is funded with dollops of debt capital (as they are unable to pool in with their share of additional equity in the event of a further issue of equity capital) to keep the wolf at bay. Ratan Tata must be eternally grateful that Mammon came to his aid.
The company is indeed the prima donna of the Indian automobile market, striding the industry like a colossus with its tentacles spreading over Asia, Europe and North Africa. From three India based manufacturing plants in FY05, with an aggregate manufacturing capacity of 514,000 vehicles, it has established three more domestic plants since raising the installed capacity to 1.3 m units. Outside India the group today has 7 plants with a capacity of 400,000 vehicles - spread over the UK, South Korea, Thailand, Spain and Morocco. The company sold 630,000 vehicles in the domestic market in FY10, a growth of 34% over that of the preceding year. (Installed capacity utilisation is however at a very low 49% - which infers idled gross block). The range of products includes heavy and medium commercial vehicles, light commercial vehicles, and passenger vehicles. The group in turn sold 880,000 vehicles worldwide including Jaguar and Land Rover vehicles, Tata Daewoo vehicles through its outfit in South Korea, and in Thailand through its subsidiary Tata Motors Thailand.
It has 66 subsidiaries, 16 of which are direct subsidiaries of the parent, with the balance coming under the category of step down subsidiaries or fellow subsidiaries. Of the 66 subsidiaries, 55 are offshore based entities, and they literally dot the entire globe. Then there are the 7 associate companies, 2 joint ventures, and such like. The joint ventures include Fiat India Automobiles Ltd.
Though the operations are increasing at a very rapid pace, the operational profit is still under strain. The 35% increase in gross sales to Rs 380 bn was accompanied by a 100% increase in trade debtors, compounded by a 60% increase in the value of its finished stock at year end. (The sales generation is arrived through a complex process. It bought Rs 64 bn worth of goods from its subsidiaries/JVs/associates, while it sold Rs 155 bn worth of goods to them. The latter deal amounts to 41% of all sales.) With the ultimate focus being on the bottom-line, the management had to also resort to some magic mantra of sorts to set matters on an even keel. In FY10 the pre-tax profit of Rs 3.6 bn was inclusive of other income of Rs 1.9 bn. Or put differently other income accounted for over 50% of the pre-tax profit. In FY09 the contribution of other income was even more humungous at 92% of pre-tax profit. The quantum of other income is neatly timed to fill in the blanks. That is to say it timed the sale of its group stocks in such a manner that it realised sufficient profit to give the bottom line a glow of sorts. Ditto the situation with the consolidated results. The only revelation here is that the management appears to be slowly coming to grips with the situation on hand.
Humungous investment portfolio
What adds to the company's woes of generating insufficient cash flows is the unfortunate fact that its humungous investments yield next to nothing in any direct benefits. The company had investments to the tune of Rs 223 bn at year end, against Rs 130 billion previously. (Believe it or not the company earned a dividend return of a mere Rs 510 m in FY10 against Rs 4 bn previously. This is an amazing state of affairs. The sad part is that it will in all probability have little succour in this department for several years to come). The bulk of these outlays represent 'tied' investments, and so these babies are there for keeps. Its equity investments in its subsidiaries alone toted up to Rs 155 bn, while group companies took away another Rs 14 bn. Investments in the preference capital of group companies made it poorer by another Rs 46 bn. Then there is a category going by the name of 'trade investments' but here too the outlay is in group companies, and so add another Rs 3.4 bn to the list. In other words the 'noose' around its neck adds up to Rs 218 bn, or roughly, the entire outlay under the 'Investment Schedule'. This excludes loans and ICDs given to subsidiaries etc of close to Rs 6 bn – which apparently bear no coupon rate, and other dues from subsidiaries in excess of Rs 1 bn. These then are among the many freebies that companies have to honour, when they embark on an expansion spree.
The biggest single equity investment among its group companies is in its new found love, TML Holdings Pte Ltd (Singapore) at Rs 128 bn (Rs 22 bn previously). It also holds what appears to be preference stock in this company to the tune of Rs 45 bn making in all an outlay of Rs 173 bn - or 78% of its entire investment portfolio. (TML Holdings is the letter head holding company of the glitzy Jaguar Land Rover UK.) The next biggest single investment, in Tata Finance, its vehicle financing arm, pales in comparison with an outlay of Rs 13.5 bn. A totally dead beat investment appears to be Fiat India Automobiles in which it has sunk in a not inconsiderate Rs 10 bn.
Consolidating the statistics
If one were to consolidate the individual statistics of the subsidiaries then the results are truly mindboggling. The subsidiaries have a collective capital base of Rs 663 bn, combined negative reserves of Rs 141 bn, total assets of Rs 1,288 bn, turnover of Rs 1,098 bn, and a combined net loss of Rs 14 bn for the latest year. There are 35 separate companies which make up the JLR group. These 35 companies account for the vast bulk of the figures mentioned above. The holding company based out of Singapore, as stated earlier, is only a postal address entity, and barring its paid up capital of Rs 180 bn, and an almost equivalent asset base (what is the makeup of these assets?) it boasts of no other calling. It has no liabilities, no income, no investments, and managed Rs 3 bn in losses. TML in turn has a sibling registered in India going by the name of TML Distribution Company. This offspring is as fascinating as the holding company. On a capital base of Rs 2.2 bn, and assets of Rs 16 bn, it registered a turnover of Rs 139 bn, and posted a pre-tax profit of RS 410 m. It is not magicians only who can pull rabbits out of a hat.
The big ticket sales as stated earlier are logged in by its many JLR siblings based out of the UK and the USA, and they also contribute to the overall losses. Why JLR requires such a plethora of units in the UK to make its point is a mystery worth exploring. The working results of JLR as presented in the annual report tell nothing of any significance to the uninitiated. The top dog among the non JLR companies is Tata Daewoo Commercial Vehicles, which is comparatively a pidgin offshoot, and boasted a turnover of Rs 25 bn, with a pipsqueak pre-tax profit of Rs 1 bn. The only other sibling of any note is Tata Motors Finance, which appears to be doing its job. It has a huge asset base of Rs 94 bn and a turnover of Rs 12 bn.
The future imperfect?
To make a long story short the stakes that Tata Motors has wagered, on the face of it, is humongous. The future of Tata Motors will then be decided by the performance or the lack of it of its overseas business. More to the point, it will be in the ability of JLR group to contribute to the cash flow of Tata Motors, given the huge bets, and the moneys that it has laid out upfront for this very purpose. There is really very little synergy between the run of the mill products that Tata Motors dishes out for the domestic automobile market, and the top of the line brands that JLR pushes in the global market. What exactly is the blueprint that Tata Motors has for a seamless melding of its multifaceted businesses if any is not readily ascertainable.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.