Recommendation: Book Profit
Current price: Rs 384 (at the time of publishing this tip)
Key points:
- Tata Motors has disclosed information on the operations of Jaguar and Land Rover (JLR), the two luxury car brands acquired from Ford Motor Company earlier this year, in its rights issue document. JLR earned a profit before tax (PBT) of US$ 583 million in H1CY2008 and a PBT of US$ 62 million in June 2008. However, due to a slowdown in the USA and Europe, the major markets for the two brands, concerns remain whether JLR would be able to maintain its volume growth and profitability.
- JLR’s “pension fund” which was fully funded at the time of acquisition (October 2007) is up for revaluation in April 2009. This could result in a need for fresh infusion of funds by the company. Further, the research and development costs may also increase substantially as the emission norms are expected to change in Europe by 2012.
- Tata Motors has around Rs 4,000 crore of foreign currency convertable bonds due for conversion in FY2011 and FY2012 at prices ranging from Rs 573 to Rs 1,001. This will either dilute the equity further or increase the interest liability in case of non-conversion and consequently poses a risk to the company’s future performance. Slowdown in domestic business, delay in product launches, shifting and thereby delay in Nano launch continue to affect the company’s sales in the domestic market. The profit margins in Q1FY2009 declined by 130 basis points to 7.7%.
- Concerns continue with regard to disclosures about JLR, slowdown in the USA, additional cost to be incurred for shifting Nano production and the consequent write offs due to the same. In addition, there are no signs of revival in the domestic businesses of the company. Due to all these factors the stock will underperform in the near future.
- Hence, I strongly advise all investors to Book Profit on the stock at the market price.
