Tata Finale

7/31/2019 Tata Finale

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CHAPTER I: INTRODUCTION

1.1 Background of the Company:

Tata Motors Limited is India's largest automobile company, with consolidated revenues of

INR 1,23,133 crores (USD 27 billion) in 2010-11.. It is the leader in commercial vehicles

and among the top three in passenger vehicles. Tata Motors has winning products in the

compact, midsize car and utility vehicle segments. The company is the world's fourth

largest truck manufacturer, and the world's second largest bus manufacturer with over

24,000 employees. Since first rolled out in 1954, Tata Motors as has produced and sold

over 6.5 million vehicles in India.

Tata Motors is the first company from India's engineering sector to be listed in the New

York Stock Exchange (September 2004), has also emerged as an international automobile

company. Through subsidiaries and associate companies, Tata Motors has operations in the

United Kingdom, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a

business comprising the two British brands which was acquired in 2008. In 2004, it

acquired the Daewoo Commercial Vehicles Company, South Korea's second largest truck

maker. The rechristened Tata Daewoo Commercial Vehicles Company has launched

several new products in the Korean market, while also exporting these products to several

international markets. Today two-thirds of heavy commercial vehicle exports out of South

Korea are from Tata Daewoo. In 2005, Tata Motors acquired a 21% stake in Hispano

Carrocera, a reputed Spanish bus and coach manufacturer, and subsequently the remaining

stake in 2009. Hispano's presence is being expanded in other markets.

In 2006, Tata Motors formed a joint venture with the Brazil-based Marcopolo, a global

leader in bodybuilding for buses and coaches to manufacture fully built buses and coaches

for India and select international markets. In 2006, Tata Motors entered into joint venture

with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and

market the company's pickup vehicles in Thailand. The new plant of Tata Motors

(Thailand) has begun production of the Xenon pickup truck, with the Xenon having been

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launched in Thailand in 2008. Tata Motors is also expanding its international footprint by

franchises and joint ventures assembly operations in Kenya, Bangladesh, Ukraine, Russia,

Senegal and South Africa.

With over 3,000 engineers and scientists, the company's Engineering Research Centre,established in 1966, has enabled pioneering technologies and products. The company today

has R&D centres in Pune, Jamshedpur, Lucknow, Dharwad in India, and in South Korea,

Spain, and the UK. It was Tata Motors, which developed the first indigenously developed

Light Commercial Vehicle, India's first Sports Utility Vehicle and, in 1998, the Tata Indica,

India's first fully indigenous passenger car. Within two years of launch, Tata Indica became

India's largest selling car in its segment. In 2005, Tata Motors created a new segment by

launching the Tata Ace, India's first indigenously developed mini-truck.

In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, a development

which signifies a first for the global automobile industry. Nano brings the comfort and

safety of a car within the reach of thousands of families. The standard version has been

priced at USD 2,200 or Rs.100, 000 (excluding VAT and transportation cost). The Tata

Nano has been subsequently launched as planned, in India in March 2009.

1.2 Acquisitions:

In 2004 Tata Motors acquired Daewoo's truck manufacturing unit, now known

as Tata Daewoo Commercial Vehicle, in South Korea.

In 2005, Tata Motors acquired 21% of Aragonese Hispano Carrocera giving it

controlling rights of the company.

In 2007, Formed a joint venture with Marcopolo of Brazil and introduced low-floor

buses in the Indian Market.

In 2008, Tata Motors acquired British Jaguar Land Rover (JLR), which includes

the Daimler and Lanchester brand names.

In 2010, Tata Motors acquired 80% stake in Italy-based design and engineering

company Trilix for a consideration of 1.85 million. The acquisition is in line with

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the companys objective to enhance its styling/design capabilities to global

standards.

1.3 Expansion:

After years of dominating the commercial vehicle market in India, Tata Motors entered the

passenger vehicle market in 1991 by launching theTata Sierra, a multi utility vehicle. After

the launch of three more vehicles, Tata Estate (1992, a stationwagon design based on the

earlier 'TataMobile' (1989), a light commercial vehicle), Tata Sumo (LCV, 1994) and Tata

Safari (1998, India's first sports utility vehicle). Tata launched the Indica in 1998, the first

fully indigenous passenger car of India. Though the car was initially panned by auto-

analysts, the car's excellent fuel economy, powerful engine and aggressive marketing

strategy made it one of the best selling cars in the history of the Indian automobile industry.

A newer version of the car, named Indica V2, was a major improvement over the previous

version and quickly became a mass-favorite. Tata Motors also successfully exported large

quantities of the car to South Africa. The success of Indica in many ways marked the rise

of Tata Motors.

1.4 Products:

Tata Motors operates in four main automobile segments which cover the range of products

in the automobile segments in India.

Passenger Cars :( 31.8% of total units sold) This division also distributes Fiat branded

cars in India. TTM has a presence in the compact car, mid-sized car and station wagon

segment of the market in the form of Indica, Indigo and Indigo Marina and their variants.

All the passenger cars are manufactured at plants at Pimpri and Chinchwad district in

Maharashtra.

Tata Motors is in the process of launching "Nano", an affordable family car with a price tag

of Rs. 1,00,000(around $2200) for the developing world. The project was delayed as the

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public opposition and political problems forced the management to abandon the plant site

at Singur, West Bengal and shift it to Gujarat.

Utility Vehicles :( 23.7% of total units sold) TTM entered the utility vehicle with the

launch of Tata Sumo in 1994. Later it also entered SUV segment with the launch of Tata

Safari in 1998.

Light Commercial Vehicles:(23.9% of total units sold) TTM manufactures light

commercial vehicles including pickup trucks, trucks and buses with gross vehicle weight

(GVW) of between 0.7 ton and 7.5 tons. TTM entered this category by indigenously

developing a low priced product Ace (mini-truck) with a 0.7 ton payload.

Medium and Heavy Commercial Vehicles:(32% of total units sold) TTM manufacturesmedium and heavy commercial vehicles which include trucks, buses, dumpers and multi-

axled vehicles with GVW of between 9 tons to 49 tons. In addition, through Tata Daewoo

Commercial Vehicle Company Limited, or TDCV, a wholly-owned subsidiary in South

Korea, TTM manufactures high horsepower trucks ranging from 220 horsepower to 400

horsepower, including dump trucks, tractor-trailers, mixers and cargo vehicles.

1.5 Operations:

Tata Motors Limited is Indias largest automobile company, with revenues

of 35,651.48 crore (US$7.84 billion) in 200708. It is the leader in commercial vehicles in

each segment, and among the top three in passenger vehicles in India with products in the

compact, midsize car and utility vehicle segments. Tata vehicles are sold primarily in India,

and over 4 million Tata vehicles have been produced domestically since the first Tata

vehicle was assembled in 1954. The companys manufacturing base in India is spread

across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar

(Uttarakhand) and Dharwad (Karnataka). Following a strategic alliance with Fiat in 2005,

Tata set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon

(Maharashtra) to produce both Fiat and Tata cars and Fiat powertrains. The company is

establishing a new plant at Sanand (Gujarat). Tata's dealership, sales, service and spare

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parts network comprises over 3500 touch points. Tata Motors also distributes and markets

Fiat branded cars in India.

Sales & Service Network

Tata Motors has more than 250 dealerships in more than 195 cities across 27 states and

4 Union Territories of India. It has the 3rd largest Sales and Service Network after Maruti

Suzuki and Hyundai.

Tata's global operations

Tata Motors has been in the process of acquiring foreign brands to increase its global

presence. Through acquisition, Tata has operations in the UK, South Korea, Thailand and

Spain. Among these acquisitions is Jaguar Land Rover, a business comprising two

struggling iconic British brands that was acquired from the Ford Motor Company in 2008.

In 2004, Tata acquired the Daewoo Commercial Vehicles Company, South Koreas second

largest truck maker. The re-branded Tata Daewoo Commercial Vehicles Company has

launched several new products in the Korean market, while also exporting these products to

several international markets. Today two-thirds of heavy commercial vehicle exports out of

South Korea are from Tata Daewoo.

In 2005, Tata Motors acquired a 21% controlling stake in Hispano Carrocera, a Spanish bus

and coach manufacturer. Tata Motors continued its market area expansion through the

introduction of new products such as buses (Starbus & Globus, jointly developed with

subsidiary Hispano Carrocera) and trucks (Novus, jointly developed with subsidiary Tata

Daewoo). In May, 2009 Tata unveiled the Tata World Truck range jointly developed with

Tata Daewoo. Debuting in South Korea, South Africa, the SAARC countries and the

Middle-East by the end of 2009. In 2006, Tata formed a joint venture with the Brazil-based

Marcopolo to manufacture fully built buses and coaches for India and other international

markets. Tata Motors has expanded its production and assembly operations to several other

countries including South Korea, Thailand, South Africa and Argentina and is planning to

set up plants in Turkey, Indonesia and Eastern Europe.

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Tata also has franchisee/joint venture assembly operations in Kenya, Bangladesh, Ukraine,

Russia and Senegal. Tata has dealerships in 26 countries across 4 continents. Though Tata

is present in many countries it has only managed to create a large consumer base in the

Indian Subcontinent, namely India, Bangladesh, Bhutan, Sri Lanka and Nepal. Tata has a

growing consumer base in Italy, Spain and South Africa.

1.6 Competitors:

Maruti Suzuki India

Based in New Delhi, India. Maruti Suzuki India Limited is a subsidiary of Suzuki Motor

(SZKMF) Corporation. It was formerly known as Maruti Udyog Limited. The Group's

principal activity is to manufacture, purchase and sale of motor vehicles and spare parts.

The Group is a subsidiary of Suzuki Motor Corporation. The other activities of the Group

comprises of dealership network of Pre-Owned Car Sales, Fleet Management and Car

Financing. The Group also provides services like framing of customized car policies,

economical leasing of cars, maintenance management, registration and insurance

management, emergency assistance and accident management. The product range includes

ten basic models with more than 50 variants. The Group has operations in over 1220 cities

with more than 2628 outlets and also exports cars to other countries. It also exports its

products to Asia, Africa, and South and Latin America.

Hyundai Motor Company

Based in Seoul, South Korea, Hyundai Motor Company manufactures and distributes

motor vehicles and parts worldwide. It offers passenger cars, recreational vehicles and

commercial vehicles, including light commercial vehicles; medium and heavy duty trucks;

special vehicles, such as refrigerated van trucks, dry van trucks, wing body trucks, and

trailer wing body/bottle carriers; medium and large size buses; and bare chassis.

Honda

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Headquartered in Tokyo, Honda Motor Co., Ltd., together with its subsidiaries develops,

manufactures and distributes motorcycles, automobiles, and power products worldwide. Its

motorcycle business manufactures motorcycles, all-terrain vehicles, and personal

watercrafts. Hondas motorcycle line consists of sports, business, and commuter models.

Its automobile business offers passenger cars, multiwagons, minivans, sport utility vehicles

and mini cars. The company also offers various financial services to its customers and

dealers. In addition, it manufactures various power products, including power tillers,

portable generators, general-purpose engines, grass cutters, outboard engines, water pumps,

snow throwers, power carriers, power sprayers, lawn mowers, and lawn tractors. Honda

sells its products through various outlets, wholesalers, and independent retail dealer.

Toyota

Headquartered in Toyota City, Japan, Toyota Motor Corporation operates in the

automotive industry worldwide. It designs, manufactures, assembles, and distributes

passenger cars, recreational and sport-utility vehicles, minivans and trucks, and related

parts and accessories. It also offers hybrid vehicles. Its products also comprise conventional

engine vehicles, including subcompact and compact cars, mini-vehicles, passenger

vehicles, commercial vehicles, auto parts, mid-size models and luxury models. In addition,

Toyota offers sports and specialty vehicles, recreational and sport-utility vehicles, pickup

trucks, minivans and cab wagons, trucks and buses. Further, the company provides finance

to dealers and their customers for the purchase or lease of Toyota vehicles. Additionally, it

is also involved in the design and manufacture of prefabricated housing and information

technology-related businesses, including intelligent transport systems and an e-commerce

marketplace, called Gazoo.com.Swaraj Mazda

Headquartered in Nawanshahar district, Punjab, the Company's principal activity is to

manufacture and sale of commercial vehicles and spares for both goods and passenger

applications. The company has inked a technical assistance agreement with Isuzu Motors.

The agreement is for the expansion of vehicle production capacity, new assembly line for

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Isuzu vehicles and also setting up of in-house facilities for the manufacture of luxury buses

based on existing Mazda and Isuzu chassis.

Mahindra & Mahindra Ltd

The company manufactures a range of automotive vehicles, agricultural tractors,

implements, and industrial engines. It is also involved in property development and

construction activities. The company offers various multi-utility vehicles, light commercial

vehicles, three-wheelers, and tractors as well as spare parts and related services. It also

provides various services related to financing, leasing, and hire purchase of automobiles

and tractors. In addition it also offers design and engineering services to the automotive,

aerospace, and general engineering industries; and produces automotive components, as

well as forgings, gears, steel, stampings, and special polymers. It is headquartered in

Mumbai, India.Ashok Leyland

Headquartered in Chennai, India, Ashok Leyland Limited Limited is involved in the

manufacture and sale of commercial vehicles, and related components and accessories in

India. The company offers various types of busses, trucks and other types of commercial

vehicles; engines for industrial, genset, and marine applications; and defense and special

vehicles. It also provides a range of spare parts for heavy engineering. It also offers design

and engineering services to the automobile, power engineering, and aerospace sectors. In

addition, it provides independent testing services in the areas of laboratory-based testing

and data acquisition, simulation durability testing, NVH testing, road load data acquisition,

safety testing and facilities management, and test laboratory consulting for auto original

equipment manufacturers and their suppliers.

CHAPTER II: FOREIGN EXCHANGE RISK EXPOSURE

Tata Motors has foreign currency exposure related to buying, selling and financing in

currencies, primarily in the US Dollar, other than the local currencies in which company

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operate. Company is also exposed to foreign currency risk related to future earnings or

assets and liabilities that are exposed due to operating cash flows and various financial

instruments that are denominated in foreign currencies.

Company use derivative instruments primarily to hedge foreign exchange exposure, and

also to hedge company interest rate exposure. Nevertheless, a weakening of the rupee

against the dollar and other major foreign currencies may have an adverse effect the cost of

borrowing and cost of imported goods/technology and consequently may increase the cost

of financing company capital expenditures. In addition, company has experienced and

expects to continue to experience foreign exchange losses and gains on obligations

denominated in foreign currencies in respect of borrowings.

The sensitivity to a change in currency prices of 1% per US$ on our unhedged foreign

currency loans as at March 31, 2008 and 2007 is Rs. 428.5 million and Rs. 329.8 million,

respectively.

Company hedge most of its exports. However, some of its imports and exports have

remained unhedged during the year. The sensitivity to a 1% change in exchange rates of

individual currencies against the rupee for the unhedged portion of its imports payables for

the year ending March 31, 2008 and 2007 is Rs. 41.5 million and Rs. 7.2 million,

respectively, and sensitivity to a 1% change in exchange rates of individual currencies

against the rupee for the unhedged portion of its exports receivables for the year ending

March 31, 2008 is Rs. 21.6 million.

2.1 Foreign currency Risk Exposure

Market risk is the risk of any loss in future earnings in realisable fair values or in future

cash flows that may result from a change in the price of a financial instrument. The value

of a financial instrument may change as a result of changes in the interest rates, foreign

currency exchange rate, equity price fluctuations, liquidity and other market changes.

Future specific market movements cannot be normally predicted with reasonable accuracy.

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10% appreciation/ depreciation of the Euro, USD, Yen and Chinese Yuan would result in

an increase/ decrease in the groups net profit before tax and net assets by approximately

10.2 million, 4.6 million, 2.2 million and 0.2 million respectively for the year ended

31 March 2011.

Currency and exchange rate fluctuations and its adverse effects on the earnings

The value of the Indian Rupee (INR) compared to the U.S. dollar impacts the value

of ADR shares of TTM and its business operations. Tata Motors stock is listed on

the NYSE. An increase in the value of the INR translates to higher share price and dividend

payments in the ADR shares all else constant. An appreciating INR can purchase

more U.S. dollar. However, on the flip side, a strengthening INR adversely impacts the

export earnings of TTM.The Companys exports constitute 9.8% of the revenues and

imports constitute 4.6% of material consumption. TTM undertakes steps

to hedge the currency risk for its operational requirements, but a weakening of the rupee

against the dollar or other major foreign currencies adversely affects the cost of borrowing

and consequently increases the financing costs. Additionally, with the acquisition of Jaguar

Land Rover, around 66% of TTM revenues are contributed by this subsidiary. The

fluctuations in the value of the British Pound against the dollar and other currencies such as

the Indian Rupee would affect the net profits.

The company has both interest-bearing assets (including cash balances) and interest-

bearing liabilities, many of which bear interest at variable rates. The company is therefore

exposed to changes in interest rates in the various markets in which the company borrow.

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While the directors revisit the appropriateness of these arrangements in light of changes to

the size or nature its operations, the company may be adversely affected by the effect of

changes in interest rates.

The company's operations are also subject to fluctuations in exchange rates with reference

to countries in which the company operate. The company sells vehicles in the United

Kingdom, North America, the Rest of Europe, China, Russia and many other markets and

therefore generates revenue in, and has significant exposure to movements of, the US

Dollar, Euro, Chinese Renminbi, Russian Rouble and other currencies relative to pounds

sterling. The company sources the majority of its input materials and components and

capital equipment from suppliers in the United Kingdom and Europe with the balance from

other countries, and therefore has cost in, and significant exposure to the movement of, the

euro and other currencies relative to pounds sterling. The majority of the company's

product development and manufacturing operations and the company's global headquarters

are based in the United Kingdom, but

the company also has national sales companies which operate in the major markets in

which the company sell vehicles.

Moreover, the company has outstanding foreign currency denominated debt and is sensitive

to fluctuations in foreign currency exchange rates. The company has experienced, and

expects to continue to experience, foreign exchange losses and gains on obligations

denominated in foreign currencies in respect of the company's borrowings and foreign

currency assets and liabilities due to currency fluctuations.

The company has managed to mitigate, to a certain extent, the foreign exchange risk in the

short and medium term by making appropriate hedging arrangements. Adequacy of

hedging lines, limitations on tenor and inherent risks of hedging arrangements themselves

continue. These are being continuously monitored for timely action within the overall

constraints.

Economic slowdown resulting in adverse impact on the sales

Automobile industry is a cyclical industry. It is substantially affected by general economic

conditions. The demand is influenced by factors including the growth rate of the economy,

easy availability of credit, increase in disposable income, interest rates, freight rates and oil

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prices. Lack of vehicle finance availability, lower growth on GDP and/or increases in fuel

prices lead to a decline in the demand for automobiles. The decrease in freight rates due to

slowdown of economy also leads to decrease in demand for commercial vehicles as

expansion of fleet size is stopped. All these factors have affected the sales of TTM. In Feb

2009, the sales in commercial vehicles segment showed a decline of 53% as compared to

that of Feb 2008. Furthermore, the turnaround and integration of the Jaguar and Land

Rover business may also be affected as the operations in over 165 countries have to

manage for the acquired companies.

2.2 Nature of exposure:

Transactional exposures

Tata Motors transacts business in various currencies and has significant revenues and

costs denominated in currencies other than the functional currency of the relevant

subsidiary, which subjects it to foreign currency risk.

Economic/ Operating Exposure

This relates the exposures caused by the economic variables to the foreign operation of

any multinational companies. These are the variables which determine the exchange rate

between the two currencies in the short and long run. MNC like Caterpillar should hedge

their foreign currency exposures by considering these factors.

2.3 Financial Outlook:

The borrowings of the Company as on March 31, 2011 stood at Rs.15,899 crores (previous

year Rs.16,595 crores). Cash and Bank balances and Current investments in Liquid / Liquid

Plus schemes of Mutual funds stood at Rs.2,514 crores (previous year Rs.2,273 crores).

Tata Motors Groups borrowings as on March 31, 2011 stood at Rs.32,791 crores (previous

year Rs.35,108 crores). Cash and Bank balances and current investments in Liquid / Liquid

Plus schemes of Mutual funds stood at Rs.12,071 crores (previous year Rs.9,808 crores).

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The key highlights were:- - The Company issued rated, listed, secured/unsecurednon-

convertible debentures of Rs.900 crores with maturities of 10 15 years as a step to raise

long term resources and optimize the loan maturity profi le.

In October 2010, the Company raised funds aggregating Rs.3,351 crores(US$ 750 million)

by an issue of 3,21,65,000 A Ordinary Shares at a price of Rs.764/- per share and

83,20,300 Ordinary Shares at a price ofRs.1,074/- per share to Qualifi ed Institutional

Buyers (QIBs), under a qualifi ed institutional placement. The said issue was well received

by the investors and the Company availed of the opportunity to price it at the mid-upper

band. This milestone in the fi nancing strategy enabled it to come closer to its objective of

balance sheet de-leveraging.

Consequent upon the holders of Foreign Currency Convertible Notes (FCCNs) of US7.07

million and JP 30 million exercising their option to convert their FCCNs to Ordinary

Shares, the Company allotted 2,35,70,426 Ordinary Shares.

The Company redeemed the 0% JP 720 million Convertible Notes as per the terms of the

issue which were remaining outstanding out of the 0% JP 11,760 million Convertible

Notes issued in 2006, the balance 93.9% of the said Notes being previously converted/

repurchased.

Tranche 1 of the secured, rated, credit enhanced, listed 2% coupon non convertible

debentures aggregating Rs.800 crores was redeemed as per the terms of issue out of the 4

tranches of debentures aggregating Rs.4,200 crores issued in 2009-10.

With a turnaround in the business and continuing strong Profitability in 2010-11, the net

debt at Jaguar Land Rover reduced to GB 233 million. During the year, Jaguar Land

Rover took steps to establish hedging lines in order to reduce risks to the business from

foreign exchange fl uctuations and establishing long term funding facilities in order to

strengthen the capital structure.

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Tata Motors Finance Ltd have raised Rs.361 crores by an issue of unsecured, non-

convertible, subordinated perpetual debentures towards Tier 1 and 2 Capital to meet its

growth strategy and improve its Capital Adequacy ratio.

Tata Motors Groups gross Debt/Equity ratio as at March 31, 2011 at 1.17 was significantly

lower as compared to 4.28 as on March 31, 2010.

2.4 Economic Analysis

The economic condition of any country will affect the business activities of the company.

The level of investment, employment, personal consumption, inflation, balance of

payment of any nation will directly affect the trade and commerce. The following given

discussion can be provided to compare the various economic indicators between the

countries. The following given diagrams and tables can be presented to assess the impacts

of determinants of exchange rate.

Relative Inflation

The inflation is the rise in average price level of the goods and services. It is the increment

in the general price level of the goods and services and the cost of the production will

increases. The following given diagram can be presented. The first bar represents the

inflation in 2012 and all other bar represents the consecutive year up to 2015.

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All the countries data are compared with the USA data. By considering the relative

inflation rate between the USA and other countries, the following table can be presented.

Current 2013 2014 2015

Canada High ( $ strong) High ( $ strong) High ( $ strong) High ( $ strong)China High ( $ strong) High ( $ strong) High ( $ strong) High ( $ strong)

Japan High ( $ strong) High ( $ strong) High ( $ strong) High ( $ strong)

Singapore High ( $ strong) High ( $ strong) High ( $ strong) High ( $ strong)

Switzerland High ( $ strong) High ( $ strong) High ( $ strong) High ( $ strong)

UK High ( $ strong) High ( $ strong) High ( $ strong) High ( $ strong)

Relative Interest Rates

An Exchange Rate is the rate at which one nation's currency can be exchanged for that of another.

Exchange rates impact, and are impacted by, international trade, in a free-market system that

helps to maintain a balance of trade and balance of capital. For example, a skewed change rate

can make a company's exports cheaper than their foreign counterparts, but for a country to

achieve this artificially they must sell their own currency by borrowing against the nation's wealth

to purchase another nation's currency. If exports or all capital are in high demand, a country's

currency will rise in value because of the demand for that currency to pay for exported goods,

services, and capital.

Relative unemployment level

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Unemployement level of the country impacts the GDP and economic growth and as result

countries with higher unemployment currencies will be weaker.

2.5 Exchange Rate Forecasts

We can forecast the exchange rate of the particular country on the basis of different data that are

relevant to predict the determination of exchange rate of the country. Such as inflation, balance

of trade, economic condition, employment, gross domestic product, risk free interest rate,

inflation, living standard, government controls, expectations, capital flows, supply and demand

for assets, political stability, portfolio investment, foreign direct investment, official monetary

reserve etc.

US Dollar to UK Pound Currency Exchange Forecast

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It seems that US dollar will be stronger in respect with UK Pounds.

Chinese Yuan to US Dollar Currency Exchange Rate

It seems that US dollar will be weaker in respect to Chinese Yuan.

US Dollar to Euro Currency Exchange Rate

It seems that US dollar will be Stronger in respect to Euro.

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India Rupee per U.S. Dollar Currency Exchange Forecast

It seems that US dollar will be weaker in respect to Indian Rupee.

CHPTER III: FOREIGN EXCHANGE RISK

MANAGEMENT

3.1 Risks

Hardening of interest rates and other inflationary trends: RBI continues with its

monetary policy measures to curb inflation. RBI has stepped up policy rates 7 times during

fiscal 2010-11 and again in May 2011, resulting in hardening of the repo rate by 225 bps to

7.25% and reverse repo by 275 bps to 6.75%. During the year, rising interest rates have

compelled the banks to increase base rate, impacting borrowing costs for corporate sector,

which has negative impact on the expansion of output and capacity expansion especially in

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the manufacturing sector. It will impact cooling down of demand side of the economy will

affect the growth of EMI driven products and also impact profit margins of the corporate

sector. Further hardening of consumer interest rates could have an adverse impact on the

automotive industry, mainly in terms of interest cost on automotive loans. Inflation could

also have a negative impact on growth and consequently on automobile sales in the

domestic market.

Exchange Rates: The Companys operations are subject to risk arising from fluctuations in

exchange rates with reference to countries in which it operates. These risks primarily relate

to fluctuations of Pound to US Dollar, Japanese Yen, Renminbi, Russian Ruble and Euro,

and fluctuations of Indian Rupee against Pound, US Dollar and Euro.

The Company imports capital equipment, raw materials and components and also sells

vehicles in various countries. These transactions are denominated in foreign currencies,

primarily the U.S. dollar and Euro. Moreover, the Company has outstanding foreign

currency denominated debt and hence it is sensitive to fluctuations in foreign currency

exchange rates. It has experienced and expects to continue to experience foreign exchange

losses and gains on obligations denominated in foreign currencies in respect of its

borrowings and foreign currency assets and liabilities due to currency fluctuations.

Although the Company engages in currency hedging as per its policy, in order to decrease

its foreign exchange exposure, the weakening of rupee against the dollar or other major

foreign currencies may have an adverse effect on its cost of borrowing and consequently

may increase its financing costs, which could have a significant adverse impact on the

results of operations

Deterioration in global economic conditions: The impact of the recent global financial

crisis continues to be a cause of concern despite concerted efforts to contain the adverse

impact of these events on global recovery.

The Indian automotive industry is affected substantially by the general economic

conditions in India and around the world. The demand for automobiles in the Indian market

is influenced by factors including the growth rate of the Indian economy, easy availability

of credit, and increase in disposable income among Indian consumers, interest rates, freight

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rates and fuel prices. During the global financial crisis, the Reserve Bank of India (RBI)

had eased its monetary policy stance to stimulate economic activity. Subsequently, as the

Indian economy started recovering from the downturn, inflation pressures increased

substantially and despite several interest rate hikes, inflation continues to be high. The

trends of higher inflation, muted industrial growth and rising interest rates are expected to

pose downside risks to overall growth. The automotive industry in general is cyclical and

economic slowdowns in the past have affected the manufacturing sector including the

automotive and related industries. Deterioration in key economic factors such as growth

rate, interest rates and inflation as well as reduced availability of financing for vehicles at

competitive rates may adversely affect our automotive sales in India and results of

operations.

Jaguar and Land Rover business has significant presence in the UK, North America and

Continental Europe and has operations in many major countries across the globe. The

Company also has automotive operations in South Korea, Spain and Thailand. The global

economic downtown significantly impacted the global automotive markets, particularly in

the United States and Europe, where Jaguar Land Rover business have significant sales

exposure. The Companys strategy, which includes new product launches and expansion

into growing markets such as China, Russia and Brazil, may not be sufficient to mitigate

the decrease in demand for its products in established markets and this could have a

significant adverse impact on the financial performance. In response to the recent economic

slowdown, the Company further intensified efforts to review and realign cost structure such

as reducing manpower costs and other fixed costs.

Further, Jaguar Land Rover business is exploring opportunities to reduce breakeven levels

through increased sourcing of materials from low cost countries, reduction in number of

suppliers, reduction in number of platforms, reduction in engineering change costs,

increased use of off-shoring and several other initiatives. Although consumer sentiments

have improved in many developed markets since late

2009, if industry demand softens because of a major debt crisis, negative economic growth

in key markets or other factors, the results of operations and financial condition could be

substantially and adversely affected.

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Changes in tax, tariff or fiscal policies: Imposition of any additional taxes and levies

designed to limit the use of automobiles could adversely affect the demand for the

Companys vehicles and the results of operations. Changes in corporate and other taxation

policies as well as changes in export and other incentives given by various governments or

import or tariff policies could also adversely affect the Companys results of operations.

Such government actions may be unpredictable and beyond the Companys control, and

any adverse changes in government policy could have a material adverse effect on its

business prospects, results of operations and financial condition.

3.2 Foreign Currency Risk

A Tata motor conducts its business globally and in that course of action it incurs its costs inforeign currency and at the same times it earns revenue in foreign currency. Hence there is

the possibility of natural hedge in the foreign currency risk. However its the return or

profit from the foreign operation exposed to the risk it is only because the fluctuating

exchange rate between the US dollar and the foreign currency may adversely may impact

its profitability and return in the competitive world and slower economic growth of

developed economies.

The risk for the Tata motor is that it has receivables in foreign currencies over the year

through the installment because it is the construction business and the foreign exchange

risk is that if the dollar become stronger i.e. more foreign currency is needed to convert to

US dollar and consequently reducing the dollar value of return and profit because the

contract of revenue is denominated in fixed foreign currency in advance.

Since the foreign currency receivable is of huge amounts of billions, Tata motor cannot

remain un-hedged. There are various hedging techniques available to Tata motor with some

premium or without premium.

3.3 Hedging Techniques used by Tata Motor

Presently following given are the techniques used by the Tata motor.

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1. Natural Hedge

In this hedging technique the firm tries to match its costs and revenue in the same

currency by expanding its operation globally.

2. Forward contract

In this type of contract Tata motor enter into the forward transaction of exchange of

currencies to be carried out in the future certain specific date at pre specified

exchange rate between two currencies i. e. US dollar and the other foreign

currencies.

3. Currency Option

In this hedging technique Tata motor has the option to execute or not to execute the

foreign exchange transaction at some future date at pre specified exchange rate with

some option premium. Tata motor has following foreign currency exchange option.

Buy call option in US dollar

Sell put option in foreign currency

4. Currency Swap

Derivative transactions

The Company uses forward exchange contracts, principal only swaps, interest rate swaps,

currency swaps and currency options to hedge its exposure in foreign currency and interest

rates. The information on derivative instruments is as follows:

(a) Derivative Instruments outstanding as at March 31, 2011

currency

amount (foreign

currency in millions) Buy/sell

Amount (Rs.

In cores)

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i) forward exchange contracts

(net) US $ 106.57 Buy 475.17

US $/ IN US $ 1.41 Sold 6.33

GBP / IN 5.31 Buy 36.18

EUR/ IN 4.67 Buy 28.27

EUR/ US $ 4 Buy 24.23

ii) option (net) US $ 39.00 To Sell 173.89

US $/ IN US $ 43.00 To Sell 193.17

iii) Cross Currency Swap US $ 31.00 To Buy 138.22

US $/ IN

Cash flow hedging

As of 31 March 2011, the group has taken out a number of cash flow hedging instruments.

The group uses both USD/GBP forward and option contracts and USD/Euro forward

contracts to hedge future cash flows from sales and purchases. The hedging risk

management policy covers forecast sales and purchases up to 3 years into the future. At 31

March 2011, all derivative contracts have a maturity of less than 1 year.

The group also has a number of USD/Euro options which are entered into as an economic

hedge of the financial risks of the group. These contracts do not meet the hedge accounting

criteria of IAS 39, so the change in fair value is recognised immediately in the income

statement.

The time value of options is considered ineffective in the hedge relationship and the change

in fair value is recognised immediately in the income statement.

As at March 31, 2010 and 31 March 2009, there are no designated cash flow hedges.

As per its risk management policy, the group uses foreign currency forward contracts to

hedge its risk associated with foreign currency fluctuations relating to highly probable

forecast sales transactions. The fair value of such forward contracts as of 31 March 2011was 29.5 million (Nil in period ended 31 March 2010 and 31 March 2009).

Changes in fair value of forward exchange contracts to the extent determined to be an

effective hedge is recognised in the statement of other comprehensive income and the

ineffective portion of the fair value change is recognised in income statement. Accordingly,

the fair value change of net gain of 29.5 million was recognised in other comprehensive

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income during the year ended 31 March 2011 (Nil in period ended 31 March 2010 and 31

March 2009).

Financial risk management

In the course of its business, the group is exposed primarily to fluctuations in foreign

currency exchange rates, interest rates, liquidity and credit risk, which may adversely

impact the fair value of its financial instruments.

The group has a risk management policy which not only covers the foreign exchange risks

but also the risks associated with the financial assets and liabilities like interest rate risks

and credit risks. The risk management policy is approved by the board of directors. The

risk management framework aims to:

Create a stable business planning environment by reducing the impact of currency and

interest rate fluctuations to the groups business plan.

Achieve greater predictability to earnings by determining the financial value of the

expected earnings in advance.

3.4 Exchange rate forecast and Analysis

The following given table and discussion can be presented.

Relative position of the US Dollar in respect to respective countries currencies based on thevarious determinants of foreign exchange studied on the research report.

S.No. Country/ Zone

Current 2013 2014 2015

1 Canada USD weaker USD Stronger USD Stronger USD Stronger

2 China USD weaker USD weaker USD weaker USD weaker

3 Japan USD Stronger USD Stronger USD weaker USD Stronger

4 Singapore USD Stronger USD Stronger USD weaker USD weaker 5 UK USD Stronger USD weaker USD weaker USD weaker

6 Euro Zone USD weaker USD weaker USD weaker USD weaker

7 India USD weaker USD weaker USD weaker USD weaker

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From the above analysis in current year i.e. 2012 US dollar will weaker in respect to

Canadian Dollar, Chinese Yuan, Euro and Indian Rupee. It means probably no currency

exchange risk as Caterpillar has receivables in those currencies. And at the same time

from the analysis it is inferred that US dollar will get stronger with Japanese Yen,

Singapore Dollar, Swiss Franc and Pound sterling and hence Caterpillar has foreign

currency risk exposure in these currencies and should be hedged with the forward

contract, currency exchange option, and money market hedge. The same logic above

explanation is also hold to the other year of operation i. e. for 2013, 2014 and 2015 also.

The analysis is only considering the only few variables for analysis and we also know that

foreign exchange market is highly volatile and hence the finding can not be generalized. In

above analysis in the case of US Dollar weaker also Tata motor cannot remain un-hedged.

In that case money market hedge will be appropriate. Since the Tata motor has account

receivables i.e. asset in foreign currencies, it will be beneficial to create liabilities in those

currencies if possible.

CHAPTER IV: CONCLUSION AND RECOMMENDATION

4.1 Conclusions

The following given conclusion can be presented:

Tata Motor is MNC operating globally to increase the market share with competing

with other global competitors to capitalize its core competencies.

It is managing its foreign exchange risk with the forward contract and currency

options.

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Natural Hedging greatly works to minimize the foreign exchange risk by matching

the costs and revenue incurred by operating production facilities in different

countries.

The world economy is slowly reviving from the global financial crisis and hence

there is the opportunity for the Tata Motor to extend its operation to capitalize oncore competencies to achieve the goal of sustainable growth.

Caterpillar forecast that its sales and profit will increase in coming year.

4.2 Recommendations

The following given points can be presented.

It would be beneficial to use money market hedge technique to minimize theforeign currency risk exposure to minimize the premium paid on the foreign

currency option contract.

The pricing of the product and services can be denominated in US Dollar.

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