India’s auto sector might be going through the worst slowdown it has seen over the last two decades, but Diwali Muharrat trading on Sunday saw Tata Motors Ltd. (TML) stock soaring 16.5 per cent following the promoters’ decision to infuse as much as Rs 6,494 crore into the company. Investor confidence in the company was also given a boost from the better-than-expected set of financials Tata Motors posted for the second quarter and an improvement in sales of Jaguar Landrover (JLR) in the Chinese market.
Tata Motors pointed out that the industry-wide slowdown over the past few quarters has “significantly impacted volumes, profitability and cash flows and increased net debt to unsustainable levels”. It also said that though it remained optimistic on the medium to long-term growth in the Indian market, near-term demand situation has become fluid. “The slowdown has come at an inopportune time when capex intensity will remain high with continued focus on exciting products and BS-VI transition,” it noted.
On the plus side, however, the company has derived some comfort in the improvement in its China business for the JLR brand. However, it did acknowledge that the overseas subsidiary faces risks from a slowing global economy, uncertainties arising from a looming Brexit, an escalating trade war between the US and China and disruptions from emerging ACES (autonomous, connectivity, electrification, and ridesharing) technologies. “We will require continued investments in products and technologies to drive growth,” it said.
These factors have all played a part in the promoter company Tata Sons deciding to infuse nearly Rs 6,500 crore in the auto major. “Despite improving business fundamentals, these external risks in TML and JLR could impact our credit ratings and our ability to refinance competitively… After careful consideration, the preferential allotment to the promoter at a premium to the current market price was chosen to minimise dilution impact and for successful and speedy execution,” the company said.
What is in the fine print?
The issue price for the ordinary shares and exercise price for warrants has been fixed at approximately Rs 150 per share, an almost 11% premium to the stock’s last 5-day average closing price. Consequently, the Group’s shareholding (voting) will increase from 37.71% to 41.71% on the allotment of ordinary shares, and up to 45.71% post warrants.