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Tata Motors: Margins play spoilsport - Views on News from Equitymaster
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Tata Motors: Margins play spoilsport
Feb 9, 2015

Tata Motors has announced its results for the third quarter ended December 2014 recently. Revenues grow by 10% YoY, while net profits fall by 26% YoY on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Net sales grow by 9.6% YoY on a consolidated basis led by the growth in the Indian operations.
  • Operating margins contract by 1.2% to 14.4% YoY during the quarter on account of the substantial rise in other expenditure (as percentage of sales).
  • Net profits fall by 26% YoY on account of the poor performance at the operating level, higher depreciation charges and tax expenses.

Consolidated financial snapshot
(Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Net sales 638,533 699,733 9.6% 1,675,165 1,952,203 16.5%
Expenditure 538,952 599,196 11.2% 1,426,786 1,644,577 15.3%
Operating profit (EBDITA) 99,581 100,537 1.0% 248,379 307,626 23.9%
EBDITA margin (%) 15.6% 14.4%   14.8% 15.8%  
Other income 1,580 2,220 40.5% 5,738 6,536 13.9%
Finance costs 10,048 10,604 5.5% 30,662 29,292 -4.5%
Depreciation 28,603 33,389 16.7% 79,527 95,319 19.9%
Exceptional items (1,243) (1,440)   (5,768) (236)  
Profit before tax 61,266 57,324 -6.4% 138,159 189,316 37.0%
Tax 13,083 21,404 63.6% 36,679 66,193 80.5%
Profit after tax/(loss) 48,183 35,920 -25.5% 101,481 123,122 21.3%
Share of profits of associates (50) 22   (364) 105  
Minority interest (85) (135)   (389) (529)  
Net profit after taxes 48,048 35,807 -25.5% 100,727 122,698 21.8%
Net profit margin (%) 7.5% 5.1%   6.0% 6.3%  
No. of shares (m)         3,218.9  
Diluted earnings per share (Rs)*         51.6  
Price to earnings ratio (x)*         10.7  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 3QFY15?
  • Tata Motors reported a revenue growth of 10% YoY for the quarter. The growth was led by both the Indian operations (up 17% YoY) and JLR (up 10% YoY in GBP terms). For the standalone entity (Indian operations), the sales volumes (including exports) of commercial vehicles declined by 8.5% YoY during the quarter. However, this was largely on account of the dip in volumes of light commercial vehicles (LCVs). Constraints on financing and over capacity impacted the demand for the LCV segment. Having said that, the performance of the medium & heavy CV (MHCV) segment was very strong as volumes were up 43% YoY during the quarter. The strong performance of this segment was attributed to positive business sentiment, firm freight rates improved profitability of fleet operators and replacement demand. Overall, in the CV segment, the company's market share stood at 50.4% during the quarter.

  • The passenger vehicles segment saw volumes grow by 4.6% YoY during the quarter in tandem with the industry growth rate of 4.3%. This was attributed to low vehicle ownership on account of the reduction in fuel prices and overall continued improvement in the economic environment. Market share of the company in car segment increased to 6.5% during the quarter.

  • While the wholesale sales volumes for JLR grew by 5% YoY, the retail sales volumes were down 0.6% YoY. The volumes of Land Rover remained flat, while those of Jaguar were down by 3.5% YoY. In terms of geographies (in wholesale volume terms), strong growth was seen in China and Asia Pacific, which accounted for 27.9% and 5.2% of sales respectively during the quarter as against 24.8% and 4.9% respectively in 3QFY14. Europe and UK also did well to grow by 10% YoY and 9% YoY in wholesale volume terms during the quarter.

  • The overall operating margins contracted by 1.2% to 14.4% YoY largely on account of the rise in other expenditure (as percentage of sales). Thus, operating profits grew by a mere 1% YoY. EBIDTA margins of JLR expanded on account of increase in wholesale volumes, and a solid product and geographical mix.

  • Net profits (excluding extraordinary items) fell by 24% YoY on account of poor performance at the operating level, higher depreciation charges and the surge in tax expenses.
What to expect?
At the current price of Rs 550, the stock trades at a multiple of 10.7 times its trailing twelve month earnings on a consolidated basis (excluding extraordinary items). Tata Motors expects auto sales to ramp up in FY16 driven by government reforms, lower interest rates and fuel prices. The company also expects the volumes of MHCVs to be more comprehensive and sustainable in FY16. Meanwhile, JNNURM Phase 2 orders are expected to boost bus volumes. In the passenger vehicles space, the company has a slew of launches lined up, which is a positive sign. According to the company, it has outlined a product plan till 2020 as per which 2 new vehicle launches will be slated every year.

As far as JLR is concerned, the company has lined up new product launches over the next 18 months. The company will be investing in new products and technologies as well as capacity expansion. Having said that, overall, in light of the current valuations, we are of the view that investors should not buy the stock at the current price levels.

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