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Tata Motors: A nightmarish quarter - Views on News from Equitymaster

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Tata Motors: A nightmarish quarter
Jan 30, 2009

Performance summary
  • Standalone topline registers a decline of 34% YoY during 3QFY09 on the back of a 32% YoY drop in volumes.
  • Operating margins decline by a huge 9.4% and operating profits fall 89% YoY on the back lower than proportionate fall in expenses.
  • Bottomline sinks into the red during the quarter on the back of higher interest expenses as well as extraordinary expenses.
  • Bottomline for the nine month period falls 73% YoY on the back of a 6% fall in topline.


Standalone results
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Units sold (000's) (excl.traded vehicles) 143,979 97,644 -32.2% 406,929 363,329 -10.7%
Net sales 72,518 47,586 -34.4% 199,813 187,659 -6.1%
Expenditure 64,320 46,671 -27.4% 178,203 176,473 -1.0%
Operating profit (EBDITA) 8,198 915 -88.8% 21,610 11,186 -48.2%
EBDITA margin (%) 11.3% 1.9%   10.8% 6.0%  
Other income 917 995 8.5% 2,505 8,444 237.1%
Interest (net) 918 1,684 83.5% 2,698 4,290 59.0%
Depreciation 1,822 2,153 18.2% 5,275 6,175 17.1%
Profit before tax 6,376 (1,926)   16,142 9,165 -43.2%
Extraordinary income/(expense) 275 (2,265)   2,643 (6,326)  
Tax 1,661 (1,559)   3,858 (1,259) -132.6%
Profit after tax/(loss) 4,990 (2,633) -152.8% 14,927 4,098 -72.5%
Net profit margin (%) 6.9% -5.5%   7.5% 2.2%  
No. of shares (m) 385.5 514.1   385.5 514.1  
Diluted earnings per share (Rs)*         18.4  
Price to earnings ratio (x)*         8.1  
(* on trailing twelve months earnings)

What has driven performance in 3QFY09?
  • Restricted availability of finance and significant contraction in freight movement in many segments of the industry led to a huge 40% YoY decline in the domestic sales of Tata Motors’ commercial vehicles (CV). On the passenger vehicles side, higher interest rates and tight liquidity conditions affected demand with domestic sales coming down by 15% on a YoY basis during the quarter. The slide, to a small extent, was halted by a favorable response to new launches like ‘Indigo CS’ and ‘Indica Vista’, which enabled the company to gain market share. It also gained share of the CV market as the 40% decline in sales was slightly better than the industry wide decline in the region of 44% during the quarter. Furthermore, with slowdown also gripping its key exports markets, the exports also came under pressure, falling a steep 45% over 3QFY08. Although the quarterly numbers look quite bad, the management has expressed hope that the worst may possible be behind for the company and things should start looking better fourth quarter onwards.

    Volumes: Not looking good!
    (Units) 3QFY07 3QFY08 3QFY09 (change)* 9mFY07 9mFY08 9mFY09 (change)*
    Domestic                
    M&HCV 44,911 44,095 17,924 -59.4% 122,305 112,871 86,720 -23.2%
    LCV 32,415 38,564 31,515 -18.3% 89,393 102,659 108,459 5.6%
    Utility Vehicles 11,427 11,270 6,141 -45.5% 31,350 30,967 27,825 -10.1%
    Cars 41,289 37,389 35,038 -6.3% 125,660 120,169 111,259 -7.4%
    Exports                
    M&HCV 3,114 2,947 1,879 -36.2% 7,953 9,924 7,272 -26.7%
    LCV 6,024 6,783 3,413 -49.7% 17,563 18,622 15,640 -16.0%
    Utility Vehicles 268 497 130 -73.8% 1,195 2,240 578 -74.2%
    Cars 2,113 2,434 1,604 -34.1% 11,517 9,477 5,576 -41.2%
    Total                
    M&HCV 48,025 47,042 19,803 -57.9% 130,258 122,795 93,992 -23.5%
    LCV 38,439 45,347 34,928 -23.0% 106,956 121,281 124,099 2.3%
    Utility Vehicles 11,695 11,767 6,271 -46.7% 32,545 33,207 28,403 -14.5%
    Cars 43,402 39,823 36,642 -8.0% 137,177 129,646 116,835 -9.9%
    Grand total 141,561 143,979 97,644 -32.2% 406,936 406,929 363,329 -10.7%
    (*3QFY09 upon 3QFY08)

  • On the operating margin front, all the major cost heads have risen as a percentage of sales during the quarter. Although raw material costs have declined the most, it has still played the biggest role in pulling the margins down by a huge 9.4% as compared to same quarter last year. This has led to a huge 89% YoY decline in operating profits for 3QFY09. Thus, a steep volume decline, adverse product mix and higher raw material prices have wreaked havoc on the company’s operating profits during the quarter.

    Cost break-up…
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Raw materials 50,422 35,861 -28.9% 138,664 137,372 -0.9%
    % sales 69.5% 75.4%   69.4% 73.2%  
    Staff cost 4,078 3,709 -9.0% 11,291 11,876 5.2%
    % sales 5.6% 7.8%   5.7% 6.3%  
    Other expenditure 9,820 7,100 -27.7% 28,248 27,225 -3.6%
    % sales 13.5% 14.9%   14.1% 14.5%  

  • Costs such as asset replacement costs and financial charges are mostly fixed in nature and do not move in tandem with operating profits. In fact, during bad times, on account of inventory pile up, interest expenses can actually increase. This is exactly what has happened with Tata Motors during the quarter and as a consequence, the company’s bottomline has turned into the red during the quarter, registering a loss to the tune of Rs 2.6 bn. The losses have been made worse by the unhedged portion of the foreign currency exposure, which stood at Rs 2.3 bn at the end of 3QFY09. Profits for the nine month period however have managed to stay in the positive, but not before falling a huge 73% over 3QFY08.

What to expect?
At the current price of Rs 146, the stock trades at a multiple of 2.7 times our estimated FY11 cash flow per share for the company. Like its management, we too are hopeful that the worst is possibly over for the company. Apart from a demand slowdown, especially at its UK subsidiary, a leveraged balance sheet is one of the key concerns facing the company in the near term. However, its cost cutting initiatives, reduced capex plans and debt restructuring initiatives are likely to see it through the troubled times. We remain positive on the stock from a 2 to 3 years perspective.

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