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Tata Motors: Losing speed

Shobhana Subramanian in Mumbai | September 24, 2008 18:23 IST

With the automobile market in the US going through a downturn, it's not surprising that the Jaguar and Land Rover (JLR) business that Tata Motors [Get Quote] acquired recently isn't in great shape. For the first half of 2008, JLR has posted losses of $ 383 million on sales of $ 7.07 billion, a disclosure that saw the Tata Motors stock fall 5 per cent on September 23.

JLR's earnings before interest and tax and pre-adjustments were $ 625 million. Given that the slowdown in the US economy is likely to continue for a while, Land Rover sales are unlikely to gather momentum in that market, which accounts for about  40 per cent of sales.

Land Rover contributes a fairly large part of the combined operating profits of JLR, which has been showing an improvement in its operating performance over the past couple of years with Ebit margins (pre-special items) improving from a negative four per cent in CY05 to 4.3 per cent in CY07.

Meanwhile, Tata Motors is raising Rs 4,147 crore (Rs 41.47 billion) through a rights issue to repay a part of the bridge loan of $ 3 billion that it took to acquire JLR. At the current price of Rs 395, a shareholder who subscribes to both classes of shares --- ordinary and differential voting shares --- would end up with an average cost for the shares of Rs 377. For those who want to own only the differential shares, which attract a dividend that is 5 per cent higher than that on ordinary shares, the average cost will be Rs 382.

As of now, the company is expected to end FY09 with consolidated profits of Rs 2,100 crore (Rs 21 billion) on revenues of close to Rs 41,000 crore (Rs 410 billion). While the stock has been a big underperformer, most of the negative news appears to have been factored into the price.


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