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Tata Motors: No speed breakers yet! - Views on News from Equitymaster
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Tata Motors: No speed breakers yet!
Jan 23, 2007

Performance summary
Tata Motors, India’s largest manufacturer of commercial vehicles has put up yet another impressive performance for the quarter and nine months ended December 2006. However, the bottomline growth comparison has been made difficult on account of profits accrued to the company during same quarter last year from the sale of stake in a subsidiary. If one were to consider the performance excluding the other income component, then the bottomline growth stands at 71% YoY during the quarter. This has been made possible on the back of a robust 37% YoY jump in topline, driven by 27% YoY growth in volumes during the quarter. Performance at the operating level has also been impressive with margins expanding by 140 basis points and profits growing by 50% YoY. On a consolidated level, while the topline growth has stood at 37% YoY during the quarter, bottomline has grown at a subdued 9% YoY rate.

Financial performance: Standalone snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Units sold ('000s) 111,605 141,623 26.9% 306,190 407,452 33.1%
Net sales 50,749 69,568 37.1% 137,556 192,507 39.9%
Expenditure 44,528 60,046 34.9% 120,718 169,035 40.0%
Operating profit (EBDITA) 6,221 9,522 53.1% 16,838 23,472 39.4%
EBDITA margin (%) 12.3% 13.7%   12.2% 12.2%  
Other income 1,684 143 -91.5% 2,847 1,851 -35.0%
Interest (net) 601 852 41.7% 1,572 2,533 61.2%
Depreciation 1,385 1,722 24.3% 4,056 4,845 19.5%
Profit before tax 5,918 7,092 19.8% 14,058 17,944 27.6%
Extraordinary income/(expense) - (5)   - (10)  
Tax 1,315 1,956 48.7% 3,350 4,566 36.3%
Profit after tax/(loss) 4,602 5,132 11.5% 10,708 13,367 24.8%
Net profit margin (%) 9.1% 7.4%   7.8% 6.9%  
No. of shares (m) 376.3 385.3   376.3 382.9  
Diluted earnings per share (Rs)* 47.8 53.3   37.3 46.6  
Price to earnings ratio (x)**         19.5  
(* annualised, ** on trailing twelve months earnings)            

What is the company’s business?
Tata Motors (Telco) is India's largest commercial vehicle (M/HCVs and LCVs) manufacturer, with a market share of 62% in FY06 (59% in FY04) and second largest producer of passenger vehicles. Its plants are located at Pune, Jamshedpur and Lucknow. From a net loss of Rs 5 bn in FY01 to a profit of Rs 15 bn in FY06, the company has come a long way. It recently acquired the CV division of South Korean auto major Daewoo and this is likely to help the company to augment growth in the higher tonnage CVs, an area that holds considerable promise in the future

What has driven performance in 3QFY07?
CVs lead the charge, again: While the company witnessed growth across all its segments, it was the 34% YoY growth in M&HCVs and 44% YoY growth in LCVs that really helped propel topline during the quarter. Further, with the company having effected two round of price hikes in M&HCVs during the year, growth in value terms was higher than in volume terms. Passenger cars and UVs also continued with their momentum and notched up volume growth of 22% YoY and 21% YoY respectively during 3QFY07. That the company was able to register such good numbers on the passenger car front despite operational constraints caused by fire at one of its plants is indicative of the buoyancy that is being witnessed in the sector. Furthermore, in order to push sales across these segments, it had offered discounts and slashed prices on some of its offerings and this too, seemed to have had a positive effect on sales.

On the macroeconomic front, freight activity has continued to be on an upswing, helping further extend the robust CV cycle. Going forward, while growth to the tune of 30%-35% per annum may not be possible over the medium term, a 10%-12% YoY growth is well within the realms of reality. In LCVs, Tata Ace, the company’s biggest success in recent times, continued to post strong growth as it encountered a pan India roll out as well as a launch in Sri Lanka. Further, in order to keep the volumes chugging along in passenger vehicles, the company would be introducing new products and variants over the next 2-3 years at specific time intervals.

Volumes: All round growth!
(Units) 3QFY06 3QFY07 %change 9mFY06 9mFY07 %change
Domestic            
M&HCV 33,594 44,911 33.7% 85,645 122,305 42.8%
LCV 22,521 32,415 43.9% 57,821 89,393 54.6%
Utility Vehicles 9,335 11,427 22.4% 24,920 31,350 25.8%
Cars 34,032 41,289 21.3% 102,590 125,660 22.5%
Exports            
M&HCV 2,287 3,168 38.5% 5,558 8,417 51.4%
LCV 4,909 6,033 22.9% 15,235 17,617 15.6%
Utility Vehicles 565 267 -52.7% 1,110 1,193 7.5%
Cars 4,353 2,113 -51.5% 13,302 11,517 -13.4%
Total            
M&HCV 35,881 48,079 34.0% 91,203 130,722 43.3%
LCV 27,430 38,448 40.2% 73,056 107,010 46.5%
Utility Vehicles 9,900 11,694 18.1% 26,030 32,543 25.0%
Cars 38,385 43,402 13.1% 115,892 137,177 18.4%
Grand total 111,596 141,623 26.9% 306,181 407,452 33.1%

Margin expansion - A positive surprise: As evident from the table below, while the company has faced some raw material costs pressure, the same was more than offset by a 200 basis point reduction in other expenses as a percentage of sales. Further, with staff cost as a percentage of sales also coming down, operating margins expanded by 140 basis points, thus giving a big boost to operating profits, a phenomenon not quite uncommon in a high operating leverage business like Tata Motors.

Cost break-up…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Raw materials 34,275 47,621 38.9% 92,009 131,698 43.1%
% sales 67.5% 68.5%   66.9% 68.4%  
Staff cost 2,799 3,581 27.9% 8,321 10,032 20.6%
% sales 5.5% 5.1%   6.0% 5.2%  
Other expenditure 7,454 8,845 18.7% 20,388 27,305 33.9%
% sales 14.7% 12.7%   14.8% 14.2%  

The other income dampener: Other income has fallen by a huge 92% during the quarter and this has dampened the company’s bottomline performance. The company had sold some stake in a group company same quarter last year, raking in a profit of Rs 1,643 m. The absence of any such figure in this year’s quarterly profit has depressed the other income. Further, with most of the dividends payments from its subsidiaries accruing to it in the first or second quarter, the other income also pales when compared on a QoQ basis.

Among other items, while interest cost rise has been a sizeable 42% YoY, there are no big reasons for concerns here as debt has remained at manageable levels. In fact, the total debt has come down by Rs 6 bn as compared to last year. With depreciation increase also being a rather benign 24% YoY, the net profits of the company have grown by 12% YoY during the quarter. For the nine month period, they have been higher at 25% YoY.

What to expect?
At the current price of Rs 930, the stock is trading at a trailing twelve month earnings multiple of 20 times. As mentioned before, while we appreciate the company’s aggressive efforts at protecting its turf, we believe there are no real sustainable long-term competitive advantages that the company has and as such margins and returns are likely to erode. With the current valuations having captured most of the growth prospects from a medium term perspective, we maintain our cautious view on the stock.

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