Tata Motors’ well timed rights issue should help to accelerate its turnaround. The Indian carmaker, which owns Jaguar Land Rover, wants to raise 75 billion rupees ($1.2 billion) to reduce debt and fund growth. A change of strategy at its struggling domestic unit is starting to bear fruit but a full turnaround may depend on factors beyond its control.
India’s largest auto company is driving in two different lanes. Its domestic operation, which makes commercial and passenger vehicles, is loss-making and had more than $3 billion of net debt at the end December 2014. Meanwhile Jaguar Land Rover, the luxury car business acquired in 2008, accounts for around 80 percent of consolidated revenues and is cash rich.
The rights issue will fund a new strategy that could reduce the drag. Tata Motors’ Indian arm has shifted its focus from ultra-cheap cars after a poor reception for the Nano, launched in 2009. Amid a wider slowdown in sales, the company’s share of the local passenger market has fallen to 5.7 percent – less than half its 2010 level. Now it plans to roll out two new models every year and there are early signs that recent launches are helping it to claw back ground lost to rivals such as Suzuki and Honda.
Returning to profitability will depend on a wider economic recovery, however. Even if net debt at Tata Motors’ Indian unit was $900 million lower, it would still face a $590 million loss in the year to March, according to Reuters Breakingviews calculations. Only the movement of more goods will fuel a pickup of commercial vehicle sales where the company is a market leader.
Tata Motors’ timing is good. Its shares are trading near an all-time high, and pricing the offering at a slim 15 percent discount to the closing price of March 24 suggests the automaker is confident that it can win investor support even though it remains without a chief executive and worries about the slowdown in China still looms over the industry. Though optimism about India’s new government is starting to fade, investors are still confident it will jumpstart growth. Tata Motors shareholders have to believe that too.