How Tata Motors plans to cut costs to address the debt pile?

Apart from the weak domestic and international demand, Tata Motor also took a hit on account of sharply higher fuel prices as well as near unaffordable rates of financing.

Jul 01, 2020 09:07 IST India Infoline News Service

The last few years have not been too good for Tata Motors. Of course, that is a euphemism because the last few years have actually been bad. The domestic auto market has been constrained for the last 2 years evincing negative growth. JLR, its biggest sales machine, has shown pressure due to weak demand in China. The company has been fighting high debt and a plethora of low margin products. Above all, the COVID-19 pandemic has virtually put the entire auto industry, including Tata Motors, back by at least a couple of years. This story is best reflected in the price chart of Tata Motors.

Data Source: BSE

As the chart depicts, the stock has lost more than 75% since the interim peak of December 2017. Apart from the weak domestic and international demand, Tata Motor also took a hit on account of sharply higher fuel prices as well as near unaffordable rates of financing.Higher insurance costs also hit auto demand. One thing that is beginning to hit Tata Motors in the midst of these operational and market challenges is the pile of debt.

How big is the pile of debt that Tata Motors is sitting on?

Tata Motors, in a way represents the larger problems faced by the Tata group. TCS has a disproportionately high contribution to the group value and giants like Tata Motors and Tata Steel are hardly contributing much. Three of the marquee names in the group viz. Tata Motors, Tata Steel and Tata Power have debt levels that are more than the market capitalization of the company. That creates a kind of value trap for the company where they are unable to build market value unless the issue of debt is addressed. The chart below captures how the debt of Tata Motors has evolved over the last five quarters.

Data Source: www.tatamotors.com

Clearly, the company does not have the cash flows at this point of time to address such a huge debt burden. The best the company can do at this point of time is to prevent cash burn and reduce investments in low-margin businesses. Let us see how exactly Tata Motors is managing this transition.

How Tata Motors is addressing cash burn?

When Tata Motors announced a net loss of Rs9,864cr for the Mar-20 quarter, it was significantly higher than what the street was expecting. But what is more important is that Tata Motors India and JLR are already running a major program to cut down on cash burn. At JLR, the “Project Charge” to save a total of £5 billion is already 70% through. Till date, JLR has managed to reduce cash burn by £3.50 billion by saving £1.90 billion in the form of investments and £600 million in the form of working capital. Another £1 billion has already been saved through cuts in overheads, material and production costs.

Even on the domestic front, Tata Motors is looking at significant reduction in cash burn. For the fiscal 2020, the domestic franchise reported operating losses of Rs2,727cr on revenues of Rs10,770cr. However, the cost reduction exercise undertaken by the company will save Rs4,500cr in the next fiscal year from the domestic business alone. As can be seen from the debt chart above, Tata Motors has overall net debt of Rs48,000cr which is nearly 150% of its current market cap. To begin with, the company needs to get its debt levels to the current market cap levels before any value creation would be possible.

There is good news on the debt front

For Tata Motors, there is good news on the debt front. Firstly, the company sits on a huge pile of liquidity. For example, Tata Motors has liquidity to the tune of £5.60 billion while TML has liquidity to the tune of £700 million. Even the debt profile is such as not to create too much pressure in the short to medium run.

For example, if you look at the debt maturity profile of JLR, more than 50% is payable only after year 2024. That will allow JLR enough time to implement its cost cutting program and work out the debt reduction plan. Even in the case of TML, nearly 40% of the debt comes up for payment only after year 2023.

In the last few months, markets across China and other key markets like North American and Europe have been showing signs of recovery in sales. However, the company is yet to set any specific target for debt reduction (unlike RIL). But the slew of cost cutting measures is aimed to at least bring the levels of debt down to market cap levels. That should be a good starting point for Tata Motors.

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