JLR Effect: The inevitable happens to Tata Motors

Tata Motors (TM), which agreed to acquire Jaguar-Land Rover (JLR) combine from Ford Motor Company for $2.3 billion, was downgraded today by Crisil. This was inevitable. TTM already had a huge drain in the form of the Nano, and now it bought a bigger one in JLR. It plans to raise over $4 billion in additional capital, most of it debt, to fund these projects. That would surely hurt the balance sheet. If all that figure is in debt, then @5% interest rates, it'll reduce the net income of the company by almost half. That means, lower EPS. That means, lower share price. With this kind of risk, investors don't give a good PE multiple. That finally results in the stock getting hammered on the bourses.

Here's the TM stock price chart after the JLR deal was announced. Not a spectacular fall (on 27th March) as the news was already priced in during the run-up to the announcement, but a fall nevertheless.


A one year chart in comparison with the Nifty.

A one year price chart. No great rallies in the stock even when the Nifty touched new all-time highs every other day during the course. Currently, it is above a crucial support level (620).


The JLR deal is the biggest challenge TM has undertaken in its lifetime so far, definitely bigger than when it plunged into the passenger car market in 1998 with the Indica. As the TM management talks, it is not looking at 3-4 quarters, but 3-4 decades, by when, India (and China) is expected to be a sufficiently large market for such cars, and Tata wants TM to be the Ford Motor Co. of India. Tata know it'll be difficult for it to develop such brands. Hence, this acquisition. Hmm, a really long-term thinking.