Vous êtes sur la page 1sur 15


Student no: 200884962

Program of study: MSc. BUSINESS MANAGEMENT



Assignment Title:

To review the Long Term financing pattern of Tata Motors rationale for its financing mix

in the context of relevant long term financing theories.

Submission date: 20/11/2008

Word count excluding Index, References & Appendix: 2,468



Long Term Finance


Balance sheet Analysis
Financial Analysis of Tata Motors
Theoretical Relevance
• Annexure 1 - Ratan Tata’s letter to the Tata Group
• Annexure 2 - Ratan Tata’s letter to the Tata Group (part 2)
• Annexure 3 - Summarized Balance Sheet of Tata Motors
Brief Background

The largest passenger automobile and commercial vehicle manufacturing company of

India Tata Motors Limited, was formerly called TELCO (TATA Engineering and Locomotive
Company), has its headquarters in Bombay, now Mumbai, India. Established in 1945, listed on
the New York Stock Exchange in 2004 has created Rs. 320 billion wealth and was one of the
top 10 wealth creators in India, With manufacturing facilities in the towns of Jamshedpur,
Lucknow, and Pune. This company was founded by Jamshetji Tata and is run by Ratan Tata
under the flagship company known as Tata and sons group. He commands 22000 employees
working in three plants as well as other regional and zonal offices across the length and
breadth of India. Tata motor’s passenger cars still need to reach
acceptable international requirements. The company commands an imposing 65% share of the
domestic commercial vehicle market and is trying to modernize this segment. The financial
business of Tata motors was separated into a subsidiary company in sep. 2006, where it
recorded a strong financial performance during the last 5 year period. From year 2003-2007,
the profits of the company went up at a CAGR of 36.4%, to attain Rs. 331, 525 million in 2007
from Rs. 95, 731 Million in 2003. By floating two rights issues at the end of Sep 2008 Tata
Motors Ltd expected to raise Rs 4, 150 crores. They are offering one ordinary share valued at
Rs. 340 every six shares expecting to net Rs. 2.90 Crores, the so called “A” share would have
different voting and dividend rights, for every such 6 shares held at a face value of 305 would
raise Rs. 1.960 Crores, these proceed would be utilized for an early repayment of the short
term funding of 2.3 Billion $ (Rs. 10,189 Crores) Borrowed for Acquisition of jaguar and Land
Rover from their principle “The Ford Motor Companies”. It is also in talks with private equity
funds to offload 25% of stake in each of the following 6 unlisted group units, they are Tata
Daewoo commercial vehicle company, HV transmissions, Tata motors finance, Tata
technologies and TELCO construction equipment, the sales of the stakes would possible
conclude by June 2009, helping it to raise further funds for this acquisition, earlier in July it sold
24% stake in an Auto component unit to a group firm and booked a profit of Rs. 110 crores, it
also sold 10 million shares or 1.36% of Tata steel for RS. 486 crores to Tata Sons, the holding
company of whole Tata group firms.

"The Company aims to monetize a part of its funds through a phased divestment of certain
investments preferably as inter-group sales wherever possible at current market prices in the
coming six to eight months," the money that will be released from these investments will
become a part of the capital to be lifted for repayment of the bridging loan taken for the Jaguar-
Land Rover acquisition. Taken in March 2008" (Tata Motors Profile)

It took a 15 month bridge loan of 3 billion in March from a consortium of banks to finance the
JLR accusation and its expansion plans
Since the rights issue was announced on 28th may its share value has fallen more than 30%
and fell by 1.82% to Rs. 429.85 on BSE, even though the bench mark index gained 3.8% to
end at 15, 049.86 points.
The Analysts say that, this is a strategic move taken by Tata Motors because it is allowing the
company to make a lot of profit even when the market is in the financial pressure allows Tata
sons to raise its wager in group companies.
If the company will follow the above mentioned trends then possibly it can raise its finances in a
low liquidity and high interest rate set-up.

Balance Sheet Analysis

(Ref. to Annexure 3)

From the above statement it is seems that the company has become highly geared year after
year. To substantiate this, the net current asset which is a representation of their long term
debit is on the increase (Rs. 27,203.30 million In 2006, Rs. 40,235.10 million in 2007, and Rs.
58,792.80 million In 2008) this forms a lower percentage of the total debit (when short term
debit and capital cases are added) the company is perhaps aware of the results that may effect
the interest on the total equity and rather have a preference for short term loans as the
environment dictate, hence, increasing the total equity year by year.
For long term financial plan and expansion of the new product (Nano) Tata has decided
to raise funds from the stock market rather than going for a loan option (GEARING). This is
because in the past heavy amounts were gained as interest on loans which have a negative
effect on the profit and returns to the stake holders. To support my analysis in financial year
2006, Rs. 36,641 million loan was taken, and in the year 2007, Rs. 79,137 million loan was
taken, And also the companies net profit margins have gone down abruptly from 6.8% in 2005
to 5.6% in 2007, most probably because of the rising cost of the raw material used by the
company, but still the profits of the Tata Motors remain highest than the other auto
manufacturers. The rate of interest on vehicles in India is running very high, because of which
the sales growth have gone a little down. Even then Tata Motors have increased there profits
to 6.2% year after year. And are still financing most of their sales, up to 31% in 2007 from 24%
in 2006. Hence, gross accounts receivable are greater than before by 35% every year and
they also had to make up the shortage of cash by borrowing. When combined with the other
expenses to the growth of fuel, it has augmented its short as well as it’s the long-term debt

“Fiscal 2006 2007 (Millions of Rupees)

Total short-term debt 7,973 33,145

(Excluding current portion of long-term debt)

Long-term debt net of current portion 27,203 40,235

Total Debt 36,641 79,137”

Financial Analysis of Tata Motors

• On the back of a 3.9% volume growth, the company registered 14.4% y-o-y growth in net
revenue to Rs.60.57 bn during 1QFY09 due to vehicle price increases and favorable mix
• Significant cost increases were witnessed in raw material consumption and employee cost
which witnessed y-o-y growth of 18.2% and 13.9% respectively.
• Excluding the impact of foreign exchange valuation related losses, the Company’s EBITDA
stood at Rs.5,304.7 mn, compared to Rs.5,463.0 mn the year ago quarter. EBITDA margin,
excluding foreign exchange losses was 7.7% in 1QFY09, compared to 9.0% 1QFY08.
• In a rising cost scenario, pressure on margins was visible as the company’s raw material
cost as percentage of net revenues of the Company rose by 240 bps to 72.0% in 1QFY09;
from 69.7% in 1QFY08.
• Cost reduction in 1Q FY09 stood at 294 mn.
• Net interest expense increased 37.7% y-o-y to Rs.1123.3 mn in Q1 FY09, compared to
Rs.815.6 mn due to rising interest rates and higher debt. However, the interest expense as
a % of net sales increased marginally from 1.3% in Q1 FY08 to 1.6% in Q1 FY09.
• Tax rate for first quarter declined substantially and stood at 5.5% as compared to 21.2% for
same period last year, on account of large dividends received by Company on its
Investments/Subsidiaries which are not taxable in the hands of the Company and weighted
deductions available on R&D expenditure.
• As on 30th June’08, the balance sheet size of the Company was Rs. 183.98 bn as
compared to Rs 150.96 bn as on 31st March’08. Net of vehicle financing loans and
receivables the Company’s capital employed was Rs 178.33 bn as on 30th June’08 against
Rs.135.76 bn as on 31st March’08.
• As on 30th June’08, 385.62 mn shares (Face value Rs.10) were outstanding on the balance
sheet of Tata Motors.
• The Gross total debt (inc. FCCNs) stood Rs 94.97 bn as on 30th June’08 as compared to
Rs. 62.8 bn as on 31st March’08. The Company’s Net Debt (Net of the surplus investible
funds) stood at Rs 89.3 bn as on 30th June’08. As on 30th June’08, the Company’s net
debt to equity ratio stood at 1.12:1.
• Up to June 30th, 2008, 99.94% of the 1% convertible Notes (due 2008) and 97.09% of the
Zero coupon Convertible Notes (due 2009) have been converted into Ordinary Shares /
ADSs. There have been no conversions of the other FCCNs issued by the Company.
• The Company’s Balance Sheet includes Receivables and loans of Rs. 27.94 bn on account
of vehicle financing business as on 30th June, 2008.
• The Company had an investible surplus of around Rs. 5.65 bn as on 30th June, 2008.

Theoretical Relevance of Tata Motors’s long term financial behavior

“As per the Trade off theory, the marginal cost and benefit of debt in determining the best
financial structure of a company is considered, at most considerate liability percentage, a
companies market value is brought up and the companies whose liability percentage diverge
from the best possible can increase their price by bringing their liability percentage towards the
target”. (European Journal of Economics)
“The pecking order theory is based on the idea of asymmetric information between
managers and investors. A company increases its debits by issuing new equities to finance
new projects because if not done the same way then and new investors are brought into
consideration then the new Investors will make most of the profit which is ”the net present
value (NPV)” of that particular project which will cause lose to the present share holders. To
avoid this most of the firms tend to finance their new projects using a security that is not
undervalued in the market, which can be internal funds or some other less dangerous debt
securities. Therefore, this is what affects the choice between internal and external financing.
(European Journal of Economics)

“The M&M theory is a theory of capital structure which explains that a company’s market price
is definite by its earning power and by the basic risk of its resources, the three most important
ways of funding, they are issuing shares, borrowing and retaining profits
“As opposed to dispersing them to shareholders in dividends” (Modigliani-Miller Theorem - M&M)

This theory also says that if there are no taxes, bankruptcy costs, and asymmetric information,
in an efficient market then a company’s value becomes solid for finance by its sources. It
makes no difference how the company’s funds are increased either by issuing stock or by
selling debt and neither matters the dividend policy of the company”. (Modigliani-Miller
Theorem - M&M)

Therefore, According to the above composed data the Tata motors raised funds from
NYSE in 2004, and then from Bombay stock Exchange, Private Equity Funds, Sale of Stakes,
Inter-Group Sales and Bridge loans, so, this is in accordance to “the pecking order theory
which says that a company increases its debits by issuing new equities to finance new projects
because if not done the same way then and new investors are brought into consideration then
the new Investors will make most of the profit which is ”the net present value (NPV)” of that
particular project which will cause lose to the present share holders. To keep away from this
situation most of the firms tend to finance their new projects using a security that is not
undervalued in the market, which can be internal funds or some other less dangerous debt
securities. Therefore, this is what affects the choice between internal and external financing”.
(Refer to the above paragraph).
Hence, the pecking order theory explains the need of the firms to rely on the internal
sources of the company for finances and also explains why the companies prefer debt to equity
if external financing is required.

Theory Criticized

The pecking order theory in practice do have some factors that make its perfection uncertain,
to start with Flannery and Rangan (2006) could not find any evidence for the Pecking order
theory. Also Frank and Goyal (2003) could not find any constancy with the pecking order
Theory, especially for small companies but found it relevant for those companies that are
already established.
“The pecking order model predicts a symmetric behavior for firms with financing deficit
(shortage of internal sources of funds) or financing surplus (excess of internal sources of
funds). In other words, firms with financing deficit issue debt to finance their new investment,
whereas firms with financing surplus end up retiring debt rather than repurchasing equity
(Shyam-Sunder and Myers, 1999). While as according to the partial adjustment model, firms
adjust toward their optimum level of debt (target leverage) with the same rate regardless if they
are above or below the target. This implies that the cost and benefit of being above the target
leverage is identical to the one of being below the target. However, the trade-off theory does
not predict such a behavior. Neous coefficient assumption. The partial adjustment model
employed to examine the trade-off theory assumes that firms across industries adjust toward
their target capital structure with the same rate. Such an assumption ignores the fact that there
are significant differences in the characteristics of different industries that affect the rate of
adjustment. The pecking order model assumes that the distribution of informational asymmetry
is homogeneous across different industries”. (Cotei and farhet 2008)

After studying the relevant capital structure theories available for my research for the long term
finance mix of a company, I have come to the conclusion that the Pecking Order Theory is the
most appropriate to describe the long term financial behavior of Tata Motors, because its
explanation towards the behavior of a company in accordance to its finance is also being
applied by Tata Motors to overcome there financial crises situation. In my conclusion I will also
add the measures to be taken by Tata Motors to improve its long term financial management
as quoted by directive given by Ratan Tata to his companies:
• “The conservation of cash to the maximum extent possible
• Draw down all loans/ lines of credits from banks and institutions to the maximum extent
• Expeditious finalize pending loan and funding agreements, even if they involve
accepting higher interest rates.
The Company should also take some major steps to:
• Improve operational efficiency
• Aggressively implement restructuring of internal cost frame work
• Drastically reduce operating expenditure
• Defer non essential capital expenditure and capacity expansion
• Put on hold any plans for acquisitions unless considered strategically critical.” (refer to
annexure 1 & 2)
With these recommendations it is expected that the Company would be more efficiently long
term financially managed. And would tide over the present recessionary trends in the
Automobile Market.

• European Journal of Economics, 2008. Finance and Administrative Science. (online)

ISSN 1450-2275 Issue 11
<http://www.eurojournalsn.com> [Assessed 13 Nov 2008]

• February 19, 2008. Edition – Motley Caps Fool (Blog by Imperial1964) (online)
[Assessed 13 Nov 2008]

• Flannery, M., and K. Rangan, 2006, “Partial Adjustment towards Target Capital Structures”,
Journal of Financial Economics 79, 459-506 [Assessed 12 Nov 2008]

• Frank, M. and V. Goyal, 2003,” Testing the Pecking Order Theory of Capital Structure”,
[Assessed 15/11/08]

• India Private Equity, Sat 27 Sep 2008

< www.indiape.com> [Assessed 13 Nov 2008]

• Investoperdia “A Forbes digital company”, (Online) Modigliani-Miller Theorem - M&M

<http://www.investopedia.com/terms/m/modigliani-millertheorem.asp> [Assessed 12 Nov

• Lemmon, M. and J. Zender, (2004), Journal of Financial Economics 67, 217-248.

“Debt Capacity and Tests of Capital Structure Theories”
Working Paper, University of Utah [Assessed 15/11/08]

• Lounge, Tue, Sep 2 2008 by Reuters

[Assessed 15/11/08]

• Ratan Tata, 6-11- 2008, all GCC Members and MD’s/CEO’s of Tata companies.

• Richard S. Chang, 16 Nov 08 The New York Times, [Assessed 10/11/08]

• Tata motors Profile (online)
<http://www.tatamotors.com/our_world/profile.php> [Assessed 12/11/ 2008]

• Tata motors financial review (online Google publication PDF) [Assessed 10/11/08]

• Thomson Reuters, 2008, ‘ Financial Statements’ Google finance,

<www.finance.google.com> [Accessed 8/11/2008].

• Vipin V. Nair , 12/1/2008, lounge Bloomberg (corporate news, online edition) [Assessed


Annexure 1

Annexure 2
Summarized Balance Sheet
Annexure 3

In Millions of INR (except for per share As of 2008-03-31 As of 2007-03-31 As of 2006-03-31 As of 2005-03-
items) 31
Cash & Equivalents 52.00 65.30 76.50 4,873.30
Short Term Investments 786.00 2,762.80 8,067.80 26,982.80
Cash and Short Term Investments 12,180.60 10,415.30 14,383.70 31,856.10
Accounts Receivable - Trade, Net 52,422.20 47,692.10 34,709.60 18,359.40
Receivables - Other - - - -
Total Receivables, Net 52,422.20 47,692.10 34,709.60 18,359.40
Total Inventory 34,340.20 33,923.10 26,303.60 21,353.60
Prepaid Expenses 1,137.20 862.50 467.70 391.90
Other Current Assets, Total 24,440.40 21,040.80 14,223.30 11,618.70
Total Current Assets 124,520.60 113,933.80 90,087.90 83,579.70

Property/Plant/Equipment, Total - Gross 150,721.20 109,262.50 86,228.30 74,415.30

Goodwill, Net 6,968.50 7,239.10 7,034.10 289.90
Intangibles, Net 3,114.10 2,990.00 2,355.10 606.40
Long Term Investments 50,390.00 22,358.90 24,133.60 21,103.80
Other Long Term Assets, Total 32,459.80 5,638.40 4,442.20 1,364.00
Total Assets 369,279.30 271,015.40 202,158.20 159,245.40

Accounts Payable 55,061.30 45,474.00 30,316.30 24,659.90

Accrued Expenses 14,595.00 8,323.70 7,437.50 7,115.80
Notes Payable/Short Term Debt 95,462.30 57,752.60 37,475.10 30,697.50
Current Port. of LT Debt/Capital Leases 14,970.70 5,757.50 1,465.30 1,108.50
Other Current liabilities, Total 3,909.30 3,470.70 4,198.80 4,105.70
Total Current Liabilities 183,998.60 120,778.50 80,893.00 67,687.40

Long Term Debt 58,792.80 40,235.10 27,203.30 25,632.70

Capital Lease Obligations - - - -
Total Long Term Debt 58,792.80 40,235.10 27,203.30 25,632.70

Total Debt 169,225.80 103,745.20 66,143.70 57,438.70

Deferred Income Tax 6,119.90 5,983.60 6,135.20 5,390.90

Minority Interest 5,634.80 4,054.10 3,303.80 2,330.90
Other Liabilities, Total 9,469.10 8,595.20 3,607.10 1,794.30
Total Liabilities 264,015.20 179,646.50 121,142.40 102,836.20

Redeemable Preferred Stock, Total - - - -

Preferred Stock - Non Redeemable, Net - - - -
Common Stock, Total 3,855.40 3,854.10 3,828.70 3,617.90
Additional Paid-In Capital 39,778.60 39,711.00 38,773.60 28,143.30
Retained Earnings (Accumulated Deficit) 43,718.70 36,326.80 23,897.00 14,033.90
Treasury Stock - Common - - - -
Other Equity, Total 17,911.40 11,477.00 14,516.50 10,614.10
Total Equity 105,264.10 91,368.90 81,015.80 56,409.20

Total Liabilities & Shareholders'

369,279.30 271,015.40 202,158.20 159,245.40

Shares Outs - Common Stock Primary

- - - -
Total Common Shares Outstanding 385.49 385.36 382.82 361.74

In Millions of INR (except for per share items)

In Millions of INR (except for per 12 months Ending 12 months Ending 12 months Ending 12 months Ending 2005-
share items) 2008-03-31 2007-03-31 2006-03-31 03-31
Net Income/Starting Line 14,205.90 18,111.60 15,010.60 13,256.20
Depreciation/Depletion 6,944.20 5,943.10 5,470.30 4,888.80
Amortization 842.30 663.20 373.10 33.20
Deferred Taxes -428.10 828.80 684.60 904.90
Non-Cash Items -688.60 452.30 -1,273.60 -550.90
Changes in Working Capital 14,595.10 -8,506.50 -14,598.70 5,094.50
Cash from Operating Activities 35,470.80 17,492.50 5,666.30 23,626.70

Capital Expenditures -42,707.20 -25,277.00 -10,734.40 -9,162.70

Other Investing Cash Flow Items, Total -31,311.80 -28,686.90 1,684.20 -26,243.50
Cash from Investing Activities -74,019.00 -53,963.90 -9,050.20 -35,406.20

Financing Cash Flow Items -253.10 -152.90 -127.90 -118.70

Total Cash Dividends Paid -6,763.20 -5,678.60 -5,147.50 -1,653.80
Issuance (Retirement) of Stock, Net 351.20 161.80 674.30 1,495.30
Issuance (Retirement) of Debt, Net 50,311.20 44,143.30 9,051.50 10,264.60
Cash from Financing Activities 43,646.10 38,473.60 4,450.40 9,987.40

Foreign Exchange Effects -1,355.80 -665.60 376.10 154.30

Net Change in Cash 3,742.10 1,336.60 1,442.60 -1,637.80

Cash Interest Paid, Supplemental 10,947.90 5,017.70 3,507.20 2,997.80

Cash Taxes Paid, Supplemental 6,879.50 7,056.30 5,609.80 4,685.60