7/31/2019 Tata Finale
1/26
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
1
7/31/2019 Tata Finale
2/26
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
2
7/31/2019 Tata Finale
3/26
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
3
7/31/2019 Tata Finale
4/26
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
4
7/31/2019 Tata Finale
5/26
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.
5
7/31/2019 Tata Finale
6/26
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
6
7/31/2019 Tata Finale
7/26
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
7
7/31/2019 Tata Finale
8/26
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
8
7/31/2019 Tata Finale
9/26
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.
9
7/31/2019 Tata Finale
10/26
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.
10
http://www.wikinvest.com/stock/Tata_Motors_(TTM)?action=edit§ion=97/31/2019 Tata Finale
11/26
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
11
http://www.wikinvest.com/stock/Tata_Motors_(TTM)?action=edit§ion=77/31/2019 Tata Finale
12/26
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).
12
7/31/2019 Tata Finale
13/26
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.
13
7/31/2019 Tata Finale
14/26
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.
14
7/31/2019 Tata Finale
15/26
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
15
7/31/2019 Tata Finale
16/26
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
16
7/31/2019 Tata Finale
17/26
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.
17
7/31/2019 Tata Finale
18/26
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
18
7/31/2019 Tata Finale
19/26
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
19
7/31/2019 Tata Finale
20/26
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.
20
7/31/2019 Tata Finale
21/26
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.
21
7/31/2019 Tata Finale
22/26
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)
22
7/31/2019 Tata Finale
23/26
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
23
7/31/2019 Tata Finale
24/26
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
24
7/31/2019 Tata Finale
25/26
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.
25
7/31/2019 Tata Finale
26/26
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.