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Tata Motors: A quantum jump in margins - Views on News from Equitymaster
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Tata Motors: A quantum jump in margins
Jan 30, 2010

Performance summary
  • Topline grows by a very strong 89% YoY during the quarter. It was led by a 63% growth in volumes
  • Operating profits grow nearly 13-fold as the company witnesses a huge jump in operating margins
  • Bottomline swings into a profit of Rs 4 bn as against a loss of Rs 2.6 bn during same quarter last year
  • Bottomline for the nine month period witnesses a four-fold jump on the back of a 25% growth in topline


(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Units sold (000's) (excl.traded vehicles) 97,644 159,139 63.0% 363,329 432,630 19.1%
Net sales 47,586 89,799 88.7% 187,659 233,634 24.5%
Expenditure 46,678 78,280 67.7% 176,473 204,177 15.7%
Operating profit (EBDITA) 909 11,519 1167.8% 11,186 29,456 163.3%
EBDITA margin (%) 1.9% 12.8%   6.0% 12.6%  
Other income 995 2 -99.8% 8,444 7,405 -12.3%
Interest (net) 1,684 2,861 69.9% 4,290 8,252 92.3%
Depreciation 2,154 2,867 33.1% 6,175 8,059 30.5%
Profit before tax (1,934) 5,793   9,165 20,550 124.2%
Extraordinary income/(expense) (2,257) (242) -89.3% (6,326) (451)  
Tax (1,559) 1,549   (1,259) 3,669 -391.4%
Profit after tax/(loss) (2,633) 4,001   4,098 16,430 300.9%
Net profit margin (%) -5.5% 4.5%   2.2% 7.0%  
No. of shares (m) 514.1 544.0   514.1 544.0  
Diluted earnings per share (Rs)*         41.1  
Price to earnings ratio (x)*         16.9  
* on trailing twelve months earnings

What has driven performance during 3QFY10?
  • The huge 89% jump in topline has been a combination of 63% jump in volumes and a favorable product mix. M&HCVs (Medium and heavy commercial vehicles), which are the most high value products from the company’s stable have grown the fastest and this explains the huge jump in average realizations per vehicle. The fact that excise duties have fallen to 7% of sales from 10% of sales has also helped matters. The stupendous growth in the M&HCV segment could be explained by a low base effect as well as favorable freight and financing environment.

  • LCV market, which was the first to turnaround in the CV market, continued to maintain its robust growth trajectory. Tata Motors has held its market share at 60.5% YTD in the LCV truck market compared with corresponding prior period.

  • The company’s PV (passenger vehicles) portfolio managed a strong growth of 35% YoY during the quarter. Furthermore, if sales of Fiat and JLR in India are also taken into account then the growth came in even higher at 46%. The buoyancy could be attributed to active participation by auto loan providers and improved consumer sentiments. Going forward, the company aims to launch three new models in the passenger car space and this will ensure that the growth keeps ticking.

  • Company’s exports volume grew nearly 47% YoY due to stability in the global economic condition and easing liquidity. PV volumes increased by 13.3%. Increase in volumes was seen in markets like Italy and South Africa. Commercial vehicles too saw a 57% increase due to sharp rise in markets like Bangladesh, Nepal and Sri Lanka.

    volume break up
    (Units) 3QFY08 3QFY09 3QFY10 (change)* 9mFY08 9mFY09 9mFY10 (change)*
    Domestic                
    M&HCV 44,095 17,924 39,725 121.6% 112,871 86,720 101,147 16.6%
    LCV 38,564 31,515 53,743 70.5% 102,659 108,459 154,021 42.0%
    Utility Vehicles 11,270 6,141 6,390 4.1% 30,967 27,825 22,092 -20.6%
    Cars 37,389 35,038 48,981 39.8% 120,169 111,259 131,847 18.5%
    Exports                
    M&HCV 2,947 1,879 3,683 96.0% 9,924 7,272 9,270 27.5%
    LCV 6,783 3,413 4,682 37.2% 18,622 15,640 9,627 -38.4%
    Utility Vehicles 497 130 155 19.2% 2,240 578 426 -26.3%
    Cars 2,434 1,604 1,780 11.0% 9,477 5,576 4,200 -24.7%
    Total                
    M&HCV 47,042 19,803 43,408 119.2% 122,795 93,992 110,417 17.5%
    LCV 45,347 34,928 58,425 67.3% 121,281 124,099 163,648 31.9%
    Utility Vehicles 11,767 6,271 6,545 4.4% 33,207 28,403 22,518 -20.7%
    Cars 39,823 36,642 50,761 38.5% 129,646 116,835 136,047 16.4%
    Grand total 143,979 97,644 159,139 63.0% 406,929 363,329 432,630 19.1%
    *3QFY10 upon 3QFY09

  • Operating margins have witnessed a huge jump of nearly 11% as compared to the same quarter last year, due mainly to a sizeable reduction in raw material costs as a percentage of sales. Other cost heads have also come down on a YoY basis as the company gained from economies of scale. However, on a sequential basis, margins are slightly lower as increase in cost of commodities, especially steel and tyres, caused inflationary pressures on material costs.

    cost break up
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Raw materials 35,861 61,517 71.5% 137,372 156,663 14.0%
    % sales 75.4% 68.5%   73.2% 67.1%  
    Staff cost 3,709 4,727 27.4% 11,876 13,531 13.9%
    % sales 7.8% 5.3%   6.3% 5.8%  
    Other expenditure 7,107 12,036 69.3% 27,225 33,983 24.8%
    % sales 14.9% 13.4%   14.5% 14.5%  

  • Continuing product development and capex program caused depreciation and amortization to grow 33% YoY although they remained at 3.2% of revenue for the quarter. Similarly increase in borrowings compared with same period last year to fund business requirements increased interest cost by 70% to Rs.2.8 bn. Furthermore, the company’s tax rate also jumped appreciably as it received less of tax free income during the quarter. However, despite all this increases, bottomline came in really healthy and stood at Rs 4 bn. This was in stark contrast to a loss of Rs 2.6 bn that the company posted during 3QFY09.

What to expect?
At the current price of Rs 695, the stock trades at a multiple of 8.8 times our estimated FY12 cash flow per share for the company. The company’s performance has more or less in line with our estimates especially on the bottomline front. Despite the correction in stock price in recent days, there is very little upside from the current levels from a 2-3 year perspective. Unless the financial performance improves substantially from here on, we would advice investors to exercise caution.

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