Tata Motors' net-debt-to-equity ratio at a decade high in FY21

Automaker has cumulatively raised nearly Rs 50,000 crore of fresh equity

Nearly 13 years after the acquisition of Jaguar Land Rover (JLR), Tata Motors continues to grapple in a bid to put its business on the path of sustained profitability. While its domestic business has lost money in 23 of the last 35 quarters, including the latest quarters, its British subsidiary JLR has reported losses in seven of the last 13 quarters.

JLR accounts for nearly 80 per cent of Tata Motors revenues on a consolidated basis. The losses and asset write-down at JLR have led to a steady decline in the company’s equity base. The consistent losses and a mounting debt burden have also forced the company to skip equity dividends, which is now a constant complaint at Tata Motors annual general meeting. The company has not paid any equity dividend for the last five years, a record among index companies. Its shareholders had last earned an equity dividend in 2015-16.

Not surprisingly, Tata Motors had been one the biggest laggards among index stocks in recent years. The company’s stock price has remained unchanged in the last five years against nearly 100 per cent rise in the benchmark BSE Sensex during the period.

The biggest impact of the company’s poor financial performance has been on its balance sheet and equity capital. Tata Motors net worth or shareholders’ equity at the consolidated level is down 42 per cent in the last four years from Rs 95,428 crore in FY18 to Rs 55,246 crore now.

The result has been a sharp rise in the company's debt-to-equity ratio as it continued to borrow to fund its operations. Tata Motors gross debt-to-equity ratio (on consolidated basis) worsened to a decade high of 2.26X in FY21 while long-term debt-to-equity ratio was 1.6X in FY21, according to the Capitaline database.

The company’s overall net debt-to-equity, however, was 1.4X at the end of March this year from 1.3X a year ago and a low of 0.2X at the end of March 2016. (See the adjoining chart)

Tata Motors reported a total gross debt of around Rs 1.42 trillion at the end of March this year, up 14 per cent from around Rs 1.25 trillion a year ago. The company’s borrowings have doubled in the last five years while net sales are down 8.5 per cent since FY15-16. The company, however, says that a significant part of the consolidated gross debt is accounted for by its vehicle finance subsidiary — Tata Motors Finance (TMFL). According to the Tata Motors annual report for FY21, TMFL had gross debt of around Rs 32,800 crore at the end of March this year, accounting for around a quarter of the company’s consolidated gross debt.

Tata Motor’s net debt — adjusted for cash & equivalent on its books — is, however, around half its gross debt. The company was sitting on cash & equivalent worth around Rs 66,000 crore, most of it on the books of its British subsidiary JLR. Adjusted for cash, Tata Motors had total net debt of around Rs 76,300 crore, down from a record high of Rs 80,200 crore at the end of March 2020.

The automaker, however, says that net automotive debt is only around Rs 40,000 crore, which it says is not very high considering the scale of the company’s global operations. Its automotive business, including JLR, reported consolidated revenues of Rs 2.44 trillion in FY21 and total assets of around Rs 3 trillion. However, even adjusting for cash and TMFL debt, Tata Motors net-debt-to-equity ratio was at a decade high in FY21.

The balance sheet would have been even worse if not for an aggressive equity raising by the company. Tata Motors has cumulatively raised nearly Rs 50,000 crore worth of fresh equity in the last four years that has bolstered its net worth. This is on top of nearly Rs 66,000 crore worth of fresh debt raised by the company since FY18.

Market analysts are, however, not too worried. “Tata Motors continues to maintain a strong focus on balance sheet improvement. Covid and semiconductor shortage have delayed the materialisation. As production normalises, tailwinds like new product launches by JLR and demand revival in domestic commercial vehicles will drive strong free cash flow generation in our view,” writes Chirag Shah of Edelweiss Securities.

Analysts are bullish about JLR’s prospects despite short-term challenges from a global shortage of semiconductors. Most analysts, however, expect a sharp fall in the company’s revenues and profits in FY22 due to semiconductor shortage and Covid disruption in India.