Essay: Financial crunch

Introduction

Today’s world of financial crunch, it is becoming important for companies to become more diversified and reduce their risk profile. It is therefore very important for the companies to reduce their cost, change in debt-equity profile of the company and also a good market to focus on. This paper contains the details of TATA Group Ltd. an Indian firm after taking over Jaguar and Land rover car companies how can they diversify and reduce their risk by different ways discussed.

TATA Group Ltd.

Tata Group is one of the India Largest Conglomerate company. It has around 48 subsidiaries and operates across in 85 countries and across 6 continents. The company is listed on Bombay Stock Exchange (BSE) and New York Stock Exchange (NYSE). The revenue figure for group stood at around $28.8 billion in 2008-2009.

Impact of Financial Crises

Due to recent financial Crises, the automobile sector across the globe faced a huge downturn. Many companies went bankrupt few got bailout plans eg: General Motors(GM), and many got merged with other companies such as Chrysler major impact was on American automobile Industry. During this downturn companies like Ford decided for line of credit plan, in which they decided of re-aligning their strategic goals to survive thereby removing excess flab’s such as Jaguar and Land rover sell offs.

It was then emerging market companies like TATA Group Ltd. which didn’t had any major impact due to financial crises seized the opportunity and bought these two companies or can say excess flab of Ford namely Jaguar and Land Rover.

How diversification will be beneficial for TATA group?

TATA group has their presence in almost every part of the world. By diversifying their newly owned subsidiaries such as Land Rover and Jaguar can help them to enter new markets with different product lines.

The main proposal for diversification is to setup a Manufacturing unit in Mexico which is located in Southern part of North America. Coming up with another subsidiary which is a Special Purpose Vehicle (SPV) for the company which deals in selling only Jaguar, Land Rover and Nano initially.

The manufacturing unit in Mexico will help company in reducing the cost of labour, material and other manufacturing cost. Due to its geographic location it can access easily initially in USA and later on in Canada and also cover the local market. It will also reduce the risk of the company in cost factor, such as logistics will be reduced and load on parent company will be diversified to the subsidiary, where they can focus particularly in that region. We can strategically have a product line up set up for mass appeal and suit the market requirements.

Benefits of Mexico and NAFTA.

North American Free Trade Agreement or NAFTA is one of the major reasons to setup a plant in Mexico. As per this agreement a company can trade between all the countries coming in North America without paying any tax or duty(NAFTA). This clause of the agreement allows company to reduce their cost in terms of import or export, which in turn reduces cost of the car and can help increasing their sales in current market. Availability of skilled labour at lower cost as compare to US and Canada reduces the cost of the product for the company. Even the geography of Mexico is a helping hand for the company as it allows easy access to USA and Canada. The coastal region surrounding the country helps them in any form of logistical needs such as import of some components or even export to some other nations in future. Potential local market demand is also one of the reasons to set up a plant in Mexico. Table below shows the increase in Middle class population of Mexico

1996	5.7m
2006	10.7m
2012	15m

This Middle class population is our target market in Mexico. As there is an increasing demand for low cost fuel efficient cars where TATA Nano can be a perfect fit with other segments like Jaguar and Land Rover can be a potential market for higher middle class and upper class society in the Market.

USA Market and Regulations.

The Annual car sales figure in US has increased even after the financial crises impact.

The table above shows us the increase in demand for small and family cars such as TATA Nano, the demand for which has increased these days in US market. This market in US can be easily captured as we are giving them world’s cheapest family car which complies with regulation of US government in carbon emission.

Financials

TATA motors is listed on NYSE we will come up with new Special Purpose Vehicle(SPV) for TATA group having a nomenclature ‘TLJ Automobile Inc.’. The reason behind setting up this SPV is to raise money from the Market in the form of IPO and bank loans. This will also reduce the burden on parent company and will help them to focus on a particular market which is decided and concentrate on it.

The Estimate amount for setting up the whole project is $200million. This estimation is a projection with the help of different plants setup by different companies such as Chrysler and Ford in Mexico. The amount would be financed with the perfect blend of debt-equity and personal infusion of money. Out of $200million $100million would be infused by TATA Group itself which will give them a majority of share in the company and give them a holding power to operate its financials as well as to make important decision in the company. The other $100million is in the form of equity raised from the market in the form of IPO in which $40million would be raised by it and another $60million is in form of Debt which is Bank loan. This perfect blend of debt and equity would help them in both the way by getting tax benefits from debt and by raising the money from market would reduce the burden as well as increase the holding of the company.

NPV Model

Scenario 1 only one country

	T0 $Mn	T1 $Mn	T2 $Mn	T3 $Mn	T4 $Mn	T5 $Mn
Initial Investment	(200)
Nano		3	3	3	3	3
Landrover		18	18	18	18	18
Jaguar		12	12	12	12	12
Total		33	33	33	33	33
Discount rate@ 10%		0.909	0.826	0.751	0.683	0.621
Total	(200)	29.997	27.258	24.783	22.539	20.493
Net Present Value		-74.93

The table above shows an approximate NPV of the project. The cash inflow for Nano, Land Rover and Jaguar is derived from the estimated sales figure which is counted as minimum sales figure with the help of market demand estimation. Cash flow given above is taken as an average for next five years. The figures for which is counted as follows:

Nano	3000000
Landrover	18000000
Jaguar	12000000

= $250*12000 where $250 is the cash flow for each car and 1200 is the estimated annual sales figure.

= $5000*3600 where $5000 is the cash flow for each car and 3600 is the estimated annual sales figure.

= $10000*1200 where $10,000 is the cash flow for each car and 3600 is the estimated annual sales figure.

We can see that if selling is done only in one country we get negative NPV which indicates that the project is not viable and cannot go ahead with it.

Scenario 2 counting two or more than two countries

	T0 $Mn	T1 $Mn	T2 $Mn	T3 $Mn	T4 $Mn	T5 $Mn
Initial Investment	200
Nano		6	6	6	6	6
Landrover		36	36	36	36	36
Jaguar		24	24	24	24	24
Total		66	66	66	66	66
Discount rate @10%		0.909	0.826	0.751	0.683	0.621
Total	200	59.994	54.516	49.566	45.078	40.986
Net Present Value		50.14

The table above shows us the approximate NPV for two or more than two countries (Mexico, USA, Canada) taken in picture. The cost of the project remains the same but

The sales figure are being doubled and averaged for next five years. This gives us a positive NPV which means that project is viable and can be taken into consideration.

Looking at both the scenarios we can say that the project can be taken ahead and is viable only if product is being sold in two or more than two countries which is Mexico, USA and Canada.

Difficulties in raising finance

There can be few possible difficulties which are taken into consideration for raising the finance for the company such as

Failure of IPO on the market

– If the IPO is listen in the market and there is no proper response from the market in investing in it can cause difficulty for raising finance.

High interest rates in debt

– Interest rates can be a tax beneficial but at the same time is the burden on the company if the interest rates are increased or really high can be a big problem for the company.

Economic and political uncertainty

– The economic uncertainty such as another crises of credit card in US if comes can result in failure of project.

Inflation

– High inflation rate results in high material and labour cost which inturn increases the cost of the car and reduces the profit.

Impact of consumer behaviour and market trends

– Change in taste or trend in market can also affect the market demand of the product.

Conclusion

Expanding operations in Mexico to cover USA and Local market would be viable for the company as it would increase the market for the company with different segment and product. NPV for Scenario 2 is positive, the project can be successfully implemented and will also help us in taking the bank loans. A blend of Debt and Equity, reduces the risk profile of the company and gives them a tax benefit as well as the holding power of the company. Due to NAFTA in place the company can expand easily later to Canada as well and avail of the benefits prevailing under the agreement (Tax and duty relaxations). Company can offer competitive prices due to reduced labour, manufacturing and logistics cost and implement low emission technology.

In all company can benefit to the great extent with this project and should move ahead with it.

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