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Tata Motors: Read between the lines! - Views on News from Equitymaster
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Tata Motors: Read between the lines!
Feb 10, 2006

Performance Summary
Tata Motors announced its 3QFY06 results yesterday. The topline growth outpaced volume growth, indicating better price realisations for the company. Though on the face, it appears that the operating margins have declined by 110 basis points, eliminating the foreign exchange impact (loss in 3QFY06 as compared to gain in 3QFY05), operating margins have improved. The bottomline growth of 46% YoY was largely driven by the profit on sale of a 20% stake in one of its subsidiaries. Excluding the impact of foreign exchange and the non-recurring income, net profit margins have improved by 80 basis points.

(Rs m) 3QFY05 3QFY06 Change 9MFY05 9MFY06 Change
Net sales 43,649 50,746 16.3% 120,861 137,340 13.6%
Expenditure 37,901 44,592 17.7% 106,041 120,680 13.8%
Operating profit (EBDITA) 5,749 6,154 7.0% 14,820 16,660 12.4%
EBDITA margin (%) 13.2% 12.1%   12.3% 12.1%  
Other income 247 41 -83.5% 1,365 1,204 -11.8%
Interest (net) 414 601 45.1% 1,228 1,572 28.0%
Depreciation 1,008 1,308 29.8% 3,060 3,847 25.7%
Profit before tax 4,573 4,285 -6.3% 11,897 12,445 4.6%
Extraordinary item (10) 1,633   (20) 1,613  
Tax 1,401 1,315 -6.1% 3,378 3,350 -0.8%
Profit after tax/(loss) 3,162 4,602 45.5% 8,499 10,708 26.0%
Net profit margin (%) 7.2% 9.1%   7.0% 7.8%  
No. of shares (m) 362 376   362 376  
Diluted earnings per share (Rs)*         38.8  
Price to earnings ratio (x)         19.7  
(* on trailing 12-month basis)            

What is company’s business?
Tata Motors (Telco) is India's largest commercial vehicle (M/HCVs and LCVs) manufacturer, with a market share of 65% (FY04 - 59%) and second largest producer of passenger vehicles. Its plants are located at Pune, Jamshedpur and Lucknow. It had entered into an agreement with Rover, UK for supply of 100,000 plus passenger cars over a five-year period, which however, has been terminated. From a net loss of Rs 5 bn in FY01 to a profit of Rs 12 bn in FY05, 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 3QFY06?
Volumes – A good show: As can be seen from the table below, except for the medium and heavy commercial segment (M&HCV), the company’s volume numbers are impressive. The light commercial vehicle (LCV) segment continued to outperform on account of sustained volume growth of ‘Ace’ and also the other recent launches/upgrades in the 2-ton and the 4-ton categories. With the national rollout of ‘Ace’ on the cards (currently, ‘Ace’ is being sold in five states), we believe that the LCV segment will continue to lead volume growth.

Segmental break up...
(units) 3QFY05 3QFY06 change 9MFY05 9MFY06 change
Domestic
M & HCV 34,494 33,603 -2.6% 92,390 84,649 -8.4%
LCV 16,687 22,521 35.0% 42,755 59,822 39.9%
Total CVs 51,181 56,124 9.7% 135,145 144,471 6.9%
UVs 8,146 9,335 14.6% 22,472 24,918 10.9%
Cars 30,902 34,033 10.1% 102,528 104,044 1.5%
Total 90,229 99,492 10.3% 260,145 273,433 5.1%
Exports
M & HCV 1,380 2,293 66.2% 4,089 5,558 35.9%
LCV 3,953 4,929 24.7% 9,346 14,966 60.1%
Total CVs 5,333 7,222 35.4% 13,435 20,524 52.8%
UVs 851 562 -34.0% 1,894 1,410 -25.6%
Cars 2,517 3,942 56.6% 3,951 11,596 193.5%
Total 8,701 11,726 34.8% 19,280 33,530 73.9%
Total
M & HCV 35,874 35,896 0.1% 96,479 90,207 -6.5%
LCV 20,640 27,450 33.0% 52,101 74,788 43.5%
Total CVs 56,514 63,346 12.1% 148,580 164,995 11.0%
UVs 8,997 9,897 10.0% 24,366 26,328 8.1%
Cars 33,419 37,975 13.6% 106,479 115,640 8.6%
Total 98,930 111,218 12.4% 279,425 306,963 9.9%

The real surprise of the quarter was the performance of the passenger car segment, which registered a healthy 10% YoY growth, led by a 37% YoY growth in the month of December 2005 (post the launch of ‘turbo diesel engine’ based model).

The demand for company’s products in the overseas markets also remained strong (though when compared to 9mFY06 performance, Tata Motors has underperformed in the current quarter). The performance should be viewed in light of its efforts to widen its geographical spread.

Operating margins – Foreign exchange impact: Like other automobile players, the company seems to have benefited by softer steel prices. However, the sudden jump in other operating expenses overshadowed the efforts of the company on the raw material side. The increase in the other operating expenses is primarily due to foreign exchange (forex) fluctuations. For 3QFY06, the company reported a forex loss of Rs 621 m as compared to the gain of Rs 386 m in 3QFY05. Excluding the impact of the same, operating margins have actually improved by 120 basis points.

Cost break-up…
(Rs m) 3QFY05 3QFY06 change 9MFY05 9MFY06 change
Raw materials 29,834 34,275 14.9% 81,188 92,009 13.3%
% sales 68.3% 67.5%   67.2% 67.0%  
Staff cost 2,593 2,789 7.5% 7,544 8,290 9.9%
% sales 5.9% 5.5%   6.2% 6.0%  
Other expenses 5,476 7,451 36.1% 17,312 20,246 16.9%
% sales 12.5% 14.7%   14.3% 14.7%  

Adjusted Net profit – a double whammy: The net profit has increased by 46% YoY, largely due to the profit from the sale of 20% stake in Telco Construction Equipment Company, resulting in a gain of Rs 1,643 m. Excluding the same, net profits have actually declined by 6% YoY. This can be attributed to a substantial increase in the interest burden coupled with a significant fall in other income (excluding the non-recurring income). Apart from this, the forex loss also had an impact on the bottomline.

What to expect?
At Rs 763, the stock is trading at price to cash flow multiple of 9.5 times our consolidated FY08E estimates, which is on the upper end of our valuation band (7 to 10). While the CV industry is cyclical in nature, we believe that the demand is likely to grow at 5% to 6% CAGR over the next three years. Also, we expect strong performance from subsidiaries going forward and there are further value-unlocking possibilities. Having regards to the subdued performance of the M&HCV segment in the current year (till date) and the ban on overloading by the Supreme Court, which is being implemented by various states, we would like to revisit our numbers. In the passenger car segment, the company has re-launched its flagship model ‘Indica’ in the petrol segment at a competitive price. While this is a big positive, it has to be remembered that the petrol segment is really competitive in nature and it remains to be seen how the company delivers going forward. The partnership with Fiat also could throw up positive surprises.

Considering the diversified product portfolio and the dominant position of the company in the domestic market, we believe that Tata Motors is best placed to capitalise the potential demand from the domestic arena. Tata Motors is one of our preferred plays in the auto sector from a long-term perspective.

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