JLR Effect: funding plan spooks Tata Motors' stock

Tata Motors (TM) has announced a three tier approach to financing the JLR acquisition. According to Business Line, this involves raising money through issue of shares to existing share holders (rights shares) with differential voting rights and convertible preference shares. In all, the exercise is expected to raise around Rs. 7,200 crore (around $1.7 bn) for the company. This move alone would represent an earnings dilution of 23% due to the increased capital base. A further amount of $500 mn is expected to be raised in the form of ECBs, which increases the interest burden further. As expected, the share price tanked 8% on the news and is currently trading further lower by another 10% now (see chart below), which is a 2-year low for the stock.

Chart 1: 1 year graph


Chart 2: 2 year graph

What was initially expected to be an LBO is turning out to be a vastly different one. Equity dilution was forced upon TM thanks to the credit market turmoil. What is interesting to know is how TM is going to tie-up funds for the Nano project. Going by this article, this doesn't seem to have been done yet.

Financial diffiulties apart, the increased fuel prices and the already high inflation are going to make matters worse for TM. With the ever-increasing input costs, the worsening market conditions will squeeze margins further. This also threatens the ambitious Nano project. Tata Motors is trying all options to keep the price at the promised 'one lakh', but may also give in to component suppliers' demands. The Nano & JLR may be good for the marketing guys at Tata Motors for they give the company free press mileage, but for the finance guys they seem like a hole in the pocket. By extension, same is true for the shareholders too.

KGN: A tale of a relisting

KGN Industries was a little known company before May 21, 2008. On this day, it got re-listed with a big bang and promptly came under regulators' surveillance. It listed at less than Rs.100, went up to a high of...hold your breath...Rs.55,000. Nope, it's not a typo. By midday trading that day, it was under the regulators' wrong-doing radar. BSE said that it was verifying the trades carefully to find out any hints of manipulation, but also added that it would not nullify the trades and indeed would honour them. On May 22, it closed at a little over Rs.5,000. That price gave the company a market capitalization of well over Rs.9,000 crore or $2.3 billion and took the company in the top 100 companies list in the country. All this for a company that is into some sort of trading commodities and has a total turnover of about Rs.1 crore, forget the net income. To put things in perspective, even some of our friendly neighborhood kiranawalas have more turnover than that. Anyway, it made the promoters billionaires overnight! Ironically, it was delisted from the exchange for not paying the listing fees!! Ever since the re-listing day, it is on a lower circuit. Have a look at the trade data for June 3, 2008 on the following JPG ..



A few things worth noting here are Bid Qty/Price which are obviously zero as the stock is on a lower circuit, and the LTQ which is 1 share. What is surprising is the total traded quantities traded for the day, which is only 2 shares. There were buyers at Rs.55,000 but not at a price that is under Rs.4,000. Nobody wants to buy it now! Apparently, it was driven by 'operators' - over-ambitious ones at that. Now, since the whole episode is under lens, and with electronic holdings, it is easier for the regulators to track who the buyers/sellers are for a stock, especially for one that trades in single digit quantities. So, all those operators who jacked up the price all the way to Rs,50k (I am getting tired of typing so many zeros now), went into hiding and are holding onto their shares reluctantly.

Now take a look at the following graph which shows trading data till June 3 (need to click on it to get a proper view)




I didn't keep May 21, 2008 trades as that would make other days' volumes invisible. Look at them, on one occasion (May 28), the lone share was bought at the close of market hours. There was no trading on June 2 (one thing that I discovered/realised out of this is if there's no trade, then the price remains at the previous day's level even if it is on a continuous lower circuit - there has to be a buyer for a trade to take place, isn't it!) , and today (June 3) 2 shares were traded. The question that arises now is...who are these buyers? and why are they buying in lower single digit quantities. There's no doubt, these guys are linked to the old set that drove the price upwards. Now, they have realised the grave error they committed of shooting it up beyond the skies. If they don't keep buying now, the price will stay there (as technically it has to trade to either move up or down) and come under missile attack from the regulator. With a circuit filter of 5% in place, it has a long journey to go travel to reach its destination of the sub - Rs. 100 per share. Till then, then the promoters of this company are paper billionaires, and can do nothing but keep watching as the billions evaporate!