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.