Tata Engineering FCD & NCD : Subscribe

Recommendation:

FCD: Subscribe

NCD: Subscribe

Raghuvir Srinivasan

WE RECOMMEND that investors strongly consider subscribing to the Tata Engineering debenture offer. We had given a `Buy' on the Tata Engineering stock at a price of around Rs 65 just over a month ago.

Our recommendation to the shareholders on the current debenture offer is consistent with our belief that Tata Engineering is on the comeback trail and that the pricing and other terms of the current offer are attractive. The Tata Engineering debenture offer is one of the few good ones in the current environment and shareholders should look at it seriously for subscription.

Tata Engineering's offer of secured convertible debentures of Rs 65 each in the ratio of one debenture for every four shares held is now open. The debenture comes with a detachable warrant in the ratio of one for every five debentures. The warrants can be exchanged for one equity share at a price of Rs 120 any time 18 months after the date of allotment till September 30, 2004. Each debenture would be converted into one equity share at a premium of Rs 55 on March 31, 2002 till which time it would earn an interest of 7 per cent per annum.

Shareholders are also offered non-convertible debentures in the ratio of one for every ten shares held. These debentures, with a term of six years, would earn 11 per cent per annum and there is a put/call option at the end of 24 months from the date of allotment.

The current offer is to fund the capital expenditure requirements of the company and a part of the proceeds will also be used to retire expensive term loans.

After posting a loss of Rs 500.34 crore for the last fiscal and Rs 98.90 crore in the first quarter of this year, Tata Engineering seems set for better days ahead. There are strong reasons to believe that the company has put the worst behind it.

The commercial vehicles industry, the bread-winner for the company, is showing nascent signs of a turnaround in its fortunes. July, August and September saw sequential increase in heavy commercial vehicle volumes. These months also registered a growth compared to the same months last year. And Tata Engineering has been at the vanguard of this growth in volumes. In each of those three months, the company has performed better than the earlier one and also compared to the same month last year. This is certainly an encouraging sign for a company that critically needs good cash flows from the commercial vehicle business.

In the passenger car business, Tata Engineering is again seeing a good tide in its fortunes. September saw the Indica besting established rivals such as Maruti and Hyundai in its segment. The V2 diesel Indica is generating good volumes while the company last month also launched the V2 petrol version. But a month's numbers cannot be immediately taken as proof that the Indica project is out of the woods. In fact, it is still a long way off from that but it certainly appears to be getting there if recent sales trends are any indication.

While break-even volumes in the Indica project are still some distance away, a turnaround in the commercial vehicles business would come a shot in the arm to the beleaguered finances of the company. With the Indica project yet to generate positive cash flows, the good health of the commercial vehicles business is vital to the stability of the company itself. Which is one reason why the current rising volumes in commercial vehicles is encouraging.

Shareholders would do well to realise that the company would in all probability not post a positive bottomline this fiscal as well. If the current turnaround sustains, the earliest Tata Engineering could return to the black would be the first half of 2002-03. But that possibility will be discounted by the market even now. In fact, some of the positive fallout is already visible in the stock which has moved into the Rs 80-85 band after being rangebound at Rs 65-70 for a while.

The 11 per cent yield on offer on the non-convertible debentures may appear to be a trifle low but then the debentures score high on safety and liquidity. They could form part of any good debt portfolio. As for the convertible debentures, their price appears attractive not merely because the stock now rules higher in the market but also because the downside from the offer price is minimal.

Industry Class: Automobiles

Issue Type : FCDs @ Rs.65 each in the ratio of 1:4 NCDs @ Rs.100 each in the ratio of 1:10

Offer Size : FCD -- Rs 415.77 crore

NCD -- Rs 255.86 crore

Offer Opens : September 29

Offer Closes : November 9

Lead Manager : JM Morgan Stanley