A DIFFICULT BIRTH FOR TATAS NANO

 

Tata Motors Ltd launches the Nano on Monday, amid tentative signs of a recovery for the auto industry. Volume growth, which had crashed in the last quarter, has shown a smart recovery in January and February. Year to date, the Bombay Stock Exchanges Auto Index is up 15.7%, while the benchmark index, the Sensex, has declined by 7.7%.

 

Thats a remarkable outperformance, built on hopes that the interest rate cuts will lower financing costs and banks are going to slightly loosen their purse strings.

 

Yet a closer look at the stocks that make up the Auto Index show wide divergence. The Bajaj Auto Ltd stock, for instance, is up 42% year-to-date, while Ashok Leyland Ltds gain has been a modest 10%. But the Auto Indexs performance has been dragged down by the Tata Motors scrip, which has gained just 1.2% year-to-date.

 

There are several reasons for the divergence. First and foremost, although theyre all part of the catch-all Auto Index, were comparing not just apples and oranges but apples and orangutans here. The demand for Ashok Leylands and Tata Motors commercial vehicles depends upon a completely different set of factors than the two-wheelers manufactured by Bajaj Auto or Hero Honda Motors Ltd.  Demand for motorcycles, for instance, has remained robust because of the strength of rural demand, Hero Honda being the obvious gainer because 55% of its sales come from rural areas. Analysts believe the demand for Maruti Suzuki India Ltd cars has been buoyedby demand from government employees spending their gains from the Sixth Pay Commission.

 

On the other hand, while commercial vehicle volumes too, have shown a sharp increase in February compared with the previous month, they remain very depressed on a year-on-year basis. As a report by First Global points out: The decline in truck sales in February 2009 was despite the excise duty cut of 6%, a reduction of 2% in lending rates and a depreciation allowance of 50%. The report says that around 28,000 heavy vehicles have been repossessed by auto finance companies and banks, which will affect demand for new vehicles. It also says that automobile dealers and manufacturers are presently holding four weeks inventory, as against the two weeks inventory they generally hold in the last quarter of the fiscal year. Its going to be a long, heavy slog before commercial vehicle demand stabilizes.

 

But there is one aspect of all these companies that is indeed comparable, and that is the balance sheet. These days, thats increasingly becoming all-important. Hero Honda, Bajaj Auto and Maruti Suzuki are all net cash positive. But both Tata Motors and Ashok Leyland are highly geared.

 

A Citigroup Inc. report estimates debt/Ebitda (earnings before interest, taxes, depreciation and amortization) at the end of the current fiscal year to be 0.4 for Maruti, 2.3 for Ashok Leyland and 7.1 for Tata Motors (stand-alone).

 

The Ebitda/interest ratio for fiscal 2010 is estimated at an extremely comfortable 41.1 for Maruti, 4.8 for Ashok Leyland and a very worrying 1.6 for Tata Motors.

Tata Motors debt/equity is forecast to escalate to 1.8-1.9 over fiscal 2010/2011 (assuming that the JaguarLand Rover [JLR] debt is refinanced through Tata Motors books). The report also points out, Tata Motors has to refinance almost 43% of its overall debt over FY10 (essentially the short-term loans for the JLR acquisition).

Excluding this debt, Tata Motorss foreign currency convertible bond are due for repayment toward end-FY11, early-FY12 and mid-FY13. From a cash flow perspective, Tata Motors is the only company where debt refinancing appears critical, primarily on account of the JLR related debt. The recent depreciation of the rupee too is not good news for its dollar-denominated debt.

 

Profits from the Nano, if any, are unlikely to have any impact on Tata Motors financial condition in the foreseeable future. The revolutionary new car is being launched at a time of unprecedented stress for the company. Small wonder the stock trades at a price to book well below its peers.