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Tata Motors: JLR is the show stealer - Views on News from Equitymaster

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Tata Motors: JLR is the show stealer
Feb 16, 2012

Tata Motors announced the third quarter results of financial year 2011-2012 (3QFY12). The company's consolidated revenues and net profits grow by 44% YoY and 40.5% YoY respectively during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated revenues rise by 44% YoY during 3QFY12 largely led by growth from its Jaguar Land Rover business.
  • Revenues of Tata (and other brands; including spares and financing) increase by 20% YoY during the quarter, while JLR's revenues grow by 60% YoY (not adjusted for intersegment revenues).
  • Operating profit growth at 52% YoY is higher than the growth in sales due to improvement in operating margins to 15.1% during the quarter.
  • Consolidated profits also grow by a healthy 40.5% YoY but lower than the growth in operating profits on account of higher tax expenses.


Consolidated financial performance
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Sales 314,415 452,603 44.0% 868,409 1,147,466 32.1%
Expenditure 269,529 384,333 42.6% 744,952 991,798 33.1%
Operating profit (EBDITA) 44,886 68,270 52.1% 123,456 155,668 26.1%
Operating profit margin (%) 14.3% 15.1%   14.2% 13.6%  
Other income 99 240 142.7% 640 1,610 151.5%
Interest (net) 4,993 5,769 15.5% 15,922 18,679 17.3%
Depreciation 12,388 16,159 30.4% 33,452 40,900 22.3%
Profit before tax 27,604 46,581 68.7% 74,723 97,698 30.7%
Exceptional items (327) (1,643)   536 (6,603)  
Tax 3,189 10,711 235.9% 9,280 17,860 92.5%
Share of profit in associates 263 38 -85.5% 666 174 -73.9%
Minority interest (108) (210)   (284) (584)  
Profit after tax/(loss) 24,244 34,056 40.5% 66,361 72,825 9.7%
Net profit margin (%) 7.7% 7.5%   7.6% 6.3%  
No. of shares (m)         3,173.8  
Diluted earnings per share (Rs)*         32.3  
P/E ratio (x)*         8.6  
* on a trailing 12 months basis

What has driven performance in 3QFY12?
  • Tata Motors' consolidated revenues increased by 44% YoY during the quarter. The revenue growth was led by the standalone business (up 18% YoY) as well as the Jaguar Land Rover (JLR) business (up 41% YoY in GBP terms). The company's standalone business was driven by the commercial vehicle segment, whose volumes increased by 16% YoY. Within the CV space, volumes were driven by the LCV segment (20% YoY) led by strong consumption demand, while volumes in the MHCV segment grew by a relatively lower 10% YoY. High interest rates, fuel price hikes, and slowdown in economic growth moderated growth in the MHCV segment. Further, there was a slowdown in the bus market as orders received under JNNURM scheme were fulfilled. Thus, while total CV sales growth for 9mFY12 stood at 15% YoY, on excluding bus sales, CV sales grew by 18% YoY.

  • On the other hand, passenger vehicle and utility vehicle volumes (including JLR vehicles) in the domestic market fell by 3% YoY during the quarter on account of rising interest rates, fuel price hikes and intense competition. However, this performance was better than in 2QFY11, due to healthy growth seen in volume sales of the Nano (up 33% YoY). Growth was also seen in the compact car segment as well as in utility vehicles and vans, while the mid size and executive car segment saw a decline in sales.

  • Growth in exports (up 6% YoY) was subdued during the quarter, led by CV volumes (up 10% YoY). Tata Motors' market share in the commercial vehicle space stood at 59.4% while that in passenger vehicles was 12.6%. The company took cumulative price increase of 0.7% on commercial vehicles and 1.6-2% on passenger vehicles (excluding the Nano) during the quarter.

  • As for the JLR business, global wholesale volumes during the quarter witnessed a growth of 37% YoY. While Jaguar volumes increased by 16% YoY, Land Rover volumes surged by 42% YoY. Growth was largely led by China and other developing markets.

    Segmental performance
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Tata and other brands* 123,259 148,392 20% 356,544 422,473 18%
    % of sales 39% 33% 41% 37%
    PBIT 10,558 8,196 -22% 31,835 26,202 -18%
    PBIT margins 9% 6% 9% 6%
    Jaguar and Land Rover 188,936 301,460 60% 505,436 717,310 42%
    % of sales 60% 66% 58% 63%
    PBIT 21,649 43,247 100% 57,206 87,035 52%
    PBIT margins 11% 14% 11% 12%
    Others 3,771 5,339 42% 10,928 13,901 27%
    % of sales 1% 1% 1% 1%
    Total# 315,967 455,191 44% 872,908 1,153,683 32%
    *Includes vehicles / spares and financing thereof; #Excludes inter segment revenues

  • Tata Motors' consolidated operating profits grew by 52% YoY, as operating margins expanded to 15.1% in 3QFY12 as compared to 14.3% during 3QFY11. The improvement in margins was largely on account of healthy performance by the JLR business. For the standalone entity, operating margins dipped substantially as higher input costs took toll. Besides this, the company also spent higher on marketing spends in the passenger car business to ramp up visibility as its market share was falling. The company had upped prices during the quarter which helped in softening the pressure from high input costs to some extent.

    Cost breakup...
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Raw materials 202,423 299,944 48.2% 557,391 760,684 36.5%
    % of sales 64.4% 66.3%   64.2% 66.3%  
    Staff cost 24,266 32,072 32.2% 68,497 86,652 26.5%
    % of sales 7.7% 7.1%   7.9% 7.6%  
    Product development expenses 3,148 3,957 25.7% 6,139 9,546 55.5%
    % of sales 1.0% 0.9%   0.7% 0.8%  
    Other expenditure* 39,692 48,360 21.8% 112,926 134,915 19.5%
    % of sales 12.6% 10.7%   13.0% 11.8%  
    Total 269,529 384,333 42.6% 744,952 991,798 33.1%
    *Including amount capitalised

  • Tata Motors' consolidated net profits grew by a robust 41% YoY during 3QFY12 led by strong growth in sales and operating profits with the JLR business giving the major boost. Having said that, higher tax expenses resulted in the net profit growth being a tad slower than the growth in operating profits.

What to expect?
At the current price of Rs 276, the stock is trading at a multiple of 8.6 times its trailing twelve month consolidated earnings per share. Going forward, Tata Motors intends to focus on improving its product portfolio and customer service in an environment where competitive pressures have increased. This is both in the commercial vehicles as well as the passenger vehicles space. The focus will also be on reducing costs. Having said that, factors such as rising input costs, interest rates, fuel costs will likely add pressure to the auto industry’s growth in the medium term and Tata Motors will not be immune from the same. Entering into new long term raw material contracts will play a key role on the company’s profitability going forward.

As for JLR's performance, while it has improved, we stick to our view of JLR being cyclical in nature and also a capital intensive one and thus believe that viewing it on the basis of just its recent financials should be avoided. Although the growth prospects for the company look good from a long term perspective, valuations at the current levels do not leave much on the table for investors.

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