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Cash crunch puts Tata in a corner

Ratan Naval Tata’s cup of woes are overflowing. The 71-year-old chairman of the Tata group had to suffer an embarrassment of sorts when Tata Motors admitted to problems in making payments to suppliers, reports Rajendra Palande.

business Updated: Feb 16, 2009 15:50 IST
Rajendra Palande

Ratan Naval Tata’s cup of woes are overflowing. Even as the 71-year-old chairman of the Tata group battles to keep the operations of its troubled acquired companies — UK-based steel maker Corus and premium car brands Jaguar-Land Rover (JLR), he had to suffer an embarrassment of sorts when Tata Motors admitted to problems in making payments to suppliers.

More financial stress possibly awaits the Tata group’s two of the flagships — Tata Motors and Tata Steel — as falling volumes as well as prices could shrink cash accruals over the short to medium term, further straining the financials of the two companies.

Both the companies are highly debt-heavy, particularly after the $13.7 billion acquisition of Corus and the $2.3 billion acquisition of JLR through raising of debt from banks.

In an unprecedent act, Tata Motors called upon all to “rally around in this time of crisis” after admitting to a liquidity crisis — a sea change from a cash chest of Rs 2,400 crore less than a year ago.

Credit downgrades could make make loans costlier to service and more difficult to get.

CRISIL, the Indian subsidiary of Standard & Poor’s, has downgraded Tata Motors to “A” from “AA”, which means the risk weight for the loans availed by the truck and car maker has doubled to 100 per cent. That puts pressure on bankers in lending to the firm.

“Failure to repay on the due date is considered as a default by rating agencies, even if there is a delay of just one day. A downgrade means banks have to provide for more capital for the same amount of loan,” said DR Dogra, deputy managing director of Credit Analysis & Research Ltd, a rating agency majority owned by IDBI Bank.

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