Tata Motors to raise USD 450 million through Foreign Currency Convertible Alternative Reference Securities Offering

Tata Motors Ltd (TAMO) will raise USD 450 million (approximately Rs 18 billion) through Foreign Currency Convertible Alternative Reference Securities (FACARS). The price of the issue is fixed at Rs 960.9 per share, which is 40% premium to the closing price of Rs 686.4 on 20th June 2007. The issue is opened on 21st June 2007 and expected to get close within a week’s time. The CARS will be convertible, at the option of the Company, into either Qualifying Securities, or ordinary shares or American Depositary Shares and expected to get listed on Singapore Stock Exchange. We believe TAMO to use the proceeds of FACARS mainly to fund product development and expansion program. TAMO is implementing its aggressive expansion by investing Rs100bn over next 3-4 years. We expect a equity dilution to the extent of 4.7%, with the completion of the issue and conversion of securities into equity shares.

Business Outlook and Valuation

TAMO is India’s largest commercial vehicle manufacture and commands 16% market share in passenger car segment. We expect TAMO would continue to perform well in medium to long-term period. Considering the robust demand growth, TAMO has aggressive capex plans of around Rs 100 billion over next 3-4 years, and issue of convertible securities in the foreign market is a step in this regard. We have a positive outlook on CV and passenger car segment and expect these segments to report growth of 10-12% for next 2-3 years. But the rising interest rates have created confusions among the CV buyers and we expect it to impact the demand for CVs in the short-medium term.

We assume dilution to come in FY09E and it will impact our EPS estimates of FY09E by 4.7%. At current market price of Rs 687, the TAMO stock trades at 13x on FY08E and 12x on FY09E on standalone earnings. On consolidated earnings TAMO stock trades at 11x on FY08E and 10x on FY09E earnings and it looks more attractive. We continue to remain positive on the stock and maintain BUY on the stock with a target price of Rs 932.