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Tata Motors: Difficult quarter - Views on News from Equitymaster

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Tata Motors: Difficult quarter
Jan 31, 2008

Performance Summary
  • Standalone topline registers a growth of 5% YoY during the quarter, higher than the 2% YoY growth in volumes.

  • Operating margins fall 1.5%, as expenses increase at a faster rate than the topline.

  • A more than six fold jump in other income and modest rise in interest expenses helps restrict the bottomline fall to 3% YoY.

  • 9mFY08 net profits grow 12% YoY on the back of a 4% YoY growth in topline.

  • Consolidated profits grow by 9% YoY while revenues edge higher by 13% YoY.

Standalone results
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Units sold (000's) 141,561 143,979 1.7% 406,936 406,929 0.0%
Net sales 68,958 72,518 5.2% 192,343 199,813 3.9%
Expenditure 60,133 64,321 7.0% 169,221 178,186 5.3%
Operating profit (EBDITA) 8,824 8,197 -7.1% 23,123 21,627 -6.5%
EBDITA margin (%) 12.8% 11.3%   12.0% 10.8%  
Other income 143 918 541.1% 1,851 2,488 34.4%
Interest (net) 852 918 7.7% 2,533 2,698 6.5%
Depreciation 1,722 1,822 5.8% 4,845 5,275 8.9%
Profit before tax 6,394 6,376 -0.3% 17,595 16,142 -8.3%
Extraordinary income/(expense) 693 275   339 2,643  
Tax 1,956 1,661 -15.1% 4,566 3,858 -15.5%
Profit after tax/(loss) 5,132 4,991 -2.8% 13,367 14,927 11.7%
Net profit margin (%) 7.4% 6.9%   6.9% 7.5%  
No. of shares (m) 385.3 385.5   385.3 385.5  
Diluted earnings per share (Rs)*         52.8  
Price to earnings ratio (x)**         13.9  
(* annualised, ** on trailing twelve months earnings)

What has driven performance during 3QFY08?
  • Tata Motors’ overall volumes have edged higher by 2% YoY during the quarter. Let us have a look at how each of the divisions, viz. CVs (commercial vehicles) and PVs (Passenger Vehicles) has performed during the quarter under consideration.

  • CVs: Domestic volumes have grown by 7% YoY during 3QFY08 and have been led by the LCVs where volumes were higher by an impressive 19% YoY. Here, ‘Tata Ace’ continued to dominate and despite the advent of the competition, the model continues to rake in volumes for the company in the region of 7,600 per month.

    M&HCVs have however continued to disappoint as sales were down 2% YoY. Cautious sentiments of the truck buyers towards high interest rates, a high base effect, renewed overloading of trucks in some states and lower industrial growth can been cited as some of the reasons for the poor performance of this division. Industry’ volume growth during the quarter have been slightly better than the company’s with M&HCV segment declining by 1.5% while LCVs registering a growth of 21% YoY.

  • PVs: As far as passenger vehicles are concerned, domestic volumes for the company have come off by 8% YoY during the quarter. Here, while UV sales have declined by 1% YoY, car sales contracted by 9% YoY. A challenging market environment and a slew of new launches especially in the passenger car space has resulted into a loss of market share for Tata Motors in the PV segment. However, the company remained the second largest player in the domestic market. To help it arrest further decline in sales, Tata Motors has lined up a several new models for launch in 2008, with ‘Tata Nano’, touted to be the cheapest car in the world, the key among them. Europe and Turkey.

    The volumes story…
    (Units) 3QFY06 3QFY07 3QFY08 (change)* 9mFY06 9mFY07 9mFY08 (change)*
    Domestic
    M&HCV 33,603 44,911 44,095 -1.8% 85,654 122,305 112,871 -7.7%
    LCV 22,521 32,415 38,564 19.0% 57,821 89,393 102,659 14.8%
    Utility Vehicles 9,335 11,427 11,270 -1.4% 24,920 31,350 30,967 -1.2%
    Cars 34,032 41,289 37,389 -9.4% 102,590 125,660 120,169 -4.4%
    Exports
    M&HCV 2,287 3,114 2,947 -5.4% 5,558 7,953 9,924 24.8%
    LCV 4,909 6,024 6,783 12.6% 15,235 17,563 18,622 6.0%
    Utility Vehicles 565 268 497 85.4% 1,110 1,195 2,240 87.4%
    Cars 4,353 2,113 2,434 15.2% 13,302 11,517 9,477 -17.7%
    Total
    M&HCV 35,890 48,025 47,042 -2.0% 91,212 130,258 122,795 -5.7%
    LCV 27,430 38,439 45,347 18.0% 73,056 106,956 121,281 13.4%
    Utility Vehicles 9,900 11,695 11,767 0.6% 26,030 32,545 33,207 2.0%
    Cars 38,385 43,402 39,823 -8.2% 115,892 137,177 129,646 -5.5%
    Grand total 111,605 141,561 143,979 1.7% 306,190 406,936 406,929 0.0%
    (*3QFY08 upon 3QFY07)

    Moving to exports, despite a challenging currency environment, exports have edged higher by 10% YoY during the quarter. Here, barring M&HCVs, all the other segments witnessed a positive growth with UVs showing the maximum growth rate of 85% YoY, albeit on a lower base. While exports to South Africa were impacted due to adverse macro economic factors, focused efforts have enabled growth in other key markets of South Asia, parts of Europe and Turkey.

    Cost break-up…
    (Rs m) 2QFY07 2QFY08 Change
    Raw materials 44,020 46,497 5.6%
    % sales 63.8% 64.1%  
    Staff cost 3,582 4,078 13.8%
    % sales 5.2% 5.6%  
    Other expenditure 12,531 13,746 9.7%
    % sales 18.2% 19.0%  

    Decline in bottomline has come in lower than the fall in operating profits mainly due to more than six fold jump in other income. A significant portion of this was attributed to profit on sale of 11% stake in HVAL, the 100% subsidiary of the company. The company also registered a forex gain of Rs 275 m during 3QFY08 on account of revaluation of foreign currency borrowings, deposits and loans.

What to expect?
At the current price of Rs 724, the stock is trading at a multiple of 8.4 times our estimated FY10 cash flow. This leaves the stock with a 32% upside from the current levels to our sum of the parts value of Rs 954 per share from a FY10 perspective. So far, the company has done nothing to make us change our forward estimates. However, changes lie in store if the company manages to clinch the Jaguar and Land Rover deals.

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