Tata Motors Deleveraging Goal Sparks Hope: Is it Attainable?

Tata Motors TTM has set an ambitious target of reducing debt to near-zero levels in three years. The company, which has a net automotive debt of around INR 48,000 crore (or $6.5 billion), intends to undertake strategic efforts to substantially deleverage the business and become free cash flow positive by fiscal 2022.

Tata Motors in Doldrums

Tata Motors manufactures a wide range of passenger cars and light trucks, as well as larger commercial vehicles throughout the world. British brand Jaguar Land-Rover is a wholly-owned subsidiary of the India-based auto giant.

Tata Motors’ revenues and earnings have been bearing the brunt of declining global demand, liquidity crunch, competition from ride-sharing services, as well as tariffs on parts and supplies. The coronavirus outbreak added to the woes, resulting in halted productions and sapped demand. The last reported quarter was a washout for the domestic business, which was already facing various headwinds. The Jaguar Land Rover business has also been severely affected by the COVID-19 crisis.

In the June-end quarter, Tata Motors posted revenues of  INR 31,983 crore, down 49% and 48% from the prior quarter and the year-ago period, respectively. Loss widened to INR 8,438 crore from INR 3,698.3 crore reported in the year-ago quarter. Importantly, the company has not paid dividend to shareholders for four consecutive years. Elevated leverage of the firm is a major concern. Its long-term debt to capital ratio of 0.58 compares much unfavorably with the industry’s 0.28. Amid the challenging market environment, the company expects to incur losses in the upcoming quarter.

Can Strategic Actions Help it Achieve Debt-Free Goal?

The firm has been taking actions to reduce the massive debt load. A couple of months back, the company announced a cost-saving and cash-improvement strategy that would free up nearly INR 1,500 crore by the end of the ongoing fiscal year, as well as save nearly INR 6,000 crore in the years ahead. Amid demand collapse due to the pandemic, Tata Motors has been retrenching workforce and cancelling or deferring investments in both domestic as well as luxury businesses. The firm plans to abort projects midway, which it thinks could become a drag due to the coronavirus crisis.

In a bid to preserve cash, capex spending has been reduced by 65% to INR 1,500 crore for fiscal 2021. Importantly, Tata Motors reduced investments by 50% during the ongoing fiscal year. The company will continue with belt-tightening plans, going forward. The firm will also seek to unlock investment in various non-core businesses.

Tata Motors’ chairman Chandrasekaran affirmed that debt reduction will be among the chief priorities of the company. The automaker will be focusing on sharpening brand portfolio, boosting sales, and enhancing service experience as well as sustainable mobility. Encouragingly, the company’s new models including Nexon and Altroz have been gaining popularity, and investments in the same have started yielding results.

Last Words

While there are early signs of revival, it would be prudent to not read too much into green shoots. The company indeed has a daunting task ahead of it, given the bleak outlook of the auto industry on a worldwide basis and the deleveraging timeline it has set for itself. In the light of the present circumstances, raising capital will be difficult for the firm. Further, cash generated by the company’s Jaguar Land Rover unit and domestic business over the next couple of years is not likely to be enough to retire its debt.

Certainly, its efforts to slash costs and capex will offer respite and help it in strengthening the balance sheet. Nonetheless, one needs to wait for a clearer and detailed roadmap from the company as to how it is planning to cut the huge debt load. It is therefore advisable to wait and watch until there is a better clarity of management’s debt-reduction plan.

Tata Motors currently carries a Zacks Rank #3 (Hold). Investors interested in the same industry could consider stocks like NIO Inc. NIO, Fiat Chrysler FCAU and BMW AG BAMXF. Each of these stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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