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Tata Motors: What post FY05?

Jan 31, 2005

Performance summary
Tata Motors has declared its 3QFY05 results. While the company has posted a 28% rise in net sales, net profit has increased by 50% during the quarter. Like in the last two quarters, while operating margins continued to remain under pressure in 3QFY05, net profit has grown at a faster rate owing to higher other income. Lower tax incidence has also helped matters.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 33,996 43,649 28.4% 90,798 120,861 33.1%
Expenditure 29,094 37,838 30.1% 78,192 105,556 35.0%
Operating profit (EBDITA) 4,902 5,811 18.6% 12,606 15,305 21.4%
EBDITA margin (%) 14.4% 13.3%   13.9% 12.7%  
Other income 219 381 74.0% 810 1,770 118.5%
Interest (gross) 526 549 4.3% 1,583 1,634 3.2%
Depreciation 942 1,008 7.0% 2,839 3,059 7.8%
Profit before tax 3,653 4,636 26.9% 8,995 12,383 37.7%
Extraordinary item (36) (73) 104.2% (456) (517) 13.4%
Tax 1,509 1,401 -7.1% 3,361 3,378 0.5%
Profit after tax/(loss) 2,109 3,162 49.9% 5,179 8,488 63.9%
Net profit margin (%) 6.2% 7.2%   5.7% 7.0%  
No. of shares (m) 361.8 361.8   361.8 361.8  
Diluted earnings per share (Rs)* 23.3 35.0   19.1 31.3  
Price to earnings ratio (x)         16.0  
(* annualised)            

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 59% and second largest producer of passenger vehicles. Its plants are located at Pune, Jamshedpur and Lucknow. It has entered into an agreement with Rover, UK for supply of 100,000 plus passenger cars over a five-year period. This agreement was later extended to include UVs and pick-up trucks. From a net loss of Rs 5 bn in FY01 to a profit of Rs 8.1 bn in FY04, 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 3QFY05?
Domestic up, exports subdued: One of the key reasons for the robust rise in topline is the continued demand for M/HCVs, which shows no signs of slowing down. Including FY05, the M/HCV volume sales have grown at a CAGR of 28% in the last three years, which highlights the magnitude of growth unseen in the last decade (except for mid 1990s). While economic slowdown in the late 1990s resulted in transporters postponing purchases, factors like replacement demand cushion, favourable interest rates and higher food grain output have also supported volume growth on the domestic side. On the exports front, while LCV and UV volumes registered more than 100% growth during the quarter, passenger car sales were lower by 43%. It has to be remembered that Tata Motors started exporting cars to Rover, UK in December 2003.

Domestic sales break-up
(units) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
M & HCV 28,045 34,221 22.0% 70,609 92,117 30.5%
LCV 12,450 16,687 34.0% 34,099 42,755 25.4%
UVs 7,145 8,146 14.0% 21,007 22,472 7.0%
Cars 23,098 30,902 33.8% 76,213 105,528 38.5%
Total domestic 30,243 39,048 29.1% 97,220 128,000 31.7%
Exports 7,642 8,701 13.9% 14,972 19,280 28.8%
Total Volumes 37,885 47,749 26.0% 112,192 147,280 31.3%

As far as the outlook on the sales side is concerned, the company bagged the order from the Karnataka State Transport for supply of more than 1,000 buses in January 2005, which will be delivered in 4QFY05. While this and the commencement of the Senegal shipment for 350 buses will provide the impetus at the topline level in 4QFY05, looking beyond with a two to three year view, we expect HCV demand to grow at a much slower pace of 7% to 8% CAGR. Given the rise in fuel cost and interest rates bottoming out in this calendar year, the ability of the transporters to pass on the cost is likely to be affected. This, in turn, will slowdown demand for CVs. Having said that, we had expected the HCV sector to grow by 9% to 10% at the start of FY05 against which it is running well over 25%.

Cost break-up...
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Raw materials 21,195 30,042 41.7% 57,732 83899 45.3%
% sales 62.3% 68.8%   63.6% 69.4%  
Staff cost 2,568 2,593 1.0% 6,575 7545 14.7%
% sales 7.6% 5.9%   7.2% 6.2%  
Other expenses 5,400 5,411 0.2% 13,843 16823 21.5%
% sales 15.9% 12.4%   15.2% 13.9%  
Operating margins subdue growth: As is evident from the table below, raw material costs have outpaced topline growth owing to increase in steel, rubber and other input costs. This has resulted in raw material costs increasing from 62% of sales in 3QFY04 to 69% in 3QFY05. Despite lower employee costs and control over other expenses, the impact of higher input costs is apparent at the operating level. Though the company has increased prices of cars recently, it is not commensurate to the increase in costs. If steel prices were to soften in the second half of the calendar year (though very difficult to predict), auto majors like Tata Motors will benefit significantly. Barring this, the need to launch new models and a competitive market is likely to keep operating margin expansion under check.

Other income kicker to the bottomline: Strong cash flow from operations and money raised from the FCCB seem to have shored up other income during the quarter. Interest costs has increased marginally owing to the interest payment on the FCCB. Excluding the VRS write of last year and extraordinary loss in this quarter, net profit growth is marginally slower during the quarter.

Over the last few quarters: As is evident from the quarterly graph above, clearly, while EBDITA margin is higher as compared to 2QFY05 (not comparable due to seasonality in demand), on a YoY basis, it is lower. As we go forward, increased capital expenditure towards new models and relatively less scope for interest cost reduction will result in net margins stabilising at current levels, if not lower. Softening of steel prices is the major solace to margin protection, on which we are cautious owing to competitive pressure.

What to expect?
The stock currently trades at Rs 501 implying a price to earnings multiple of 16.0 times annualised 9mFY05 earnings. We will have to upgrade our earnings estimates for FY05 in light of robust CV demand and also incorporate the merger of Tata Finance acquisition. The company hopes to benefit significantly from the Tata Finance merger in the long-term due to the latter's franchise and the ability to offer customised financing options to customers (globally, CV majors like Scania generate around 5% to 6% of consolidated revenues from the financing arm, while car manufacturers generate a much higher contribution). But at the same time, the overall return on assets is likely to come under pressure in line with the financing arm growth (financing is a low return on asset business). Clarity with respect to its Korean acquisition of Daewoo is also awaited. We will update investors about our view on the company soon.

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Nov 26, 2021 (Close)


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