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Tata Motors: Hit by weak macro environment - Views on News from Equitymaster

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Tata Motors: Hit by weak macro environment
Feb 18, 2013

Tata Motors announced its results for the quarter ended December 2012 recently. The company reported a 2% YoY increase in revenues, while net profits fell by 52% YoY on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Net sales grow by a mere 2% YoY on a consolidated basis during the quarter as the company is impacted by tepid performance in both the MHCV and passenger vehicles businesses.
  • Operating profits fall by 17% YoY as margins contract by 2.8% YoY to 12.3%.
  • Poor performance at both the topline and operating profit level coupled with higher interest costs and depreciation charges cause the bottomline to fall by 52% YoY.

Consolidated financial performance
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Net sales 452,603 460,895 1.8% 1,147,466 1,328,160 15.7%
Expenditure 384,333 404,322 5.2% 991,798 1,160,702 17.0%
Operating profit (EBDITA) 68,270 56,573 -17.1% 155,668 167,458 7.6%
EBDITA margin (%) 15.1% 12.3%   13.6% 12.6%  
Other income 1,675 1,886 12.6% 5,032 6,341 26.0%
Finance costs 7,204 9,346 29.7% 22,101 25,863 17.0%
Depreciation 16,159 20,700 28.1% 40,900 52,302 27.9%
Exceptional items (1,643) (1,735)   (6,603) (6,242)  
Profit before tax 44,938 26,679 -40.6% 91,096 89,391 -1.9%
Tax 10,711 10,318 -3.7% 17,860 28,883 61.7%
Profit after tax/(loss) 34,227 16,360 -52.2% 73,235 60,508 -17.4%
Share of profits of associates 38 67 75.3% 174 (379)  
Minority interest (210) (152)   (584) (658)  
Net profit after taxes 34,056 16,275 -52.2% 72,825 59,471 -18.3%
Net profit margin (%) 7.5% 3.5%   6.3% 4.5%  
No. of shares (m)         3,190  
Diluted earnings per share (Rs)*         40.7  
Price to earnings ratio (x)*         7.5  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 3QFY13?
  • Tata Motors reported a lukewarm revenue growth of 2% YoY. While sales from the company's standalone business declined by 17% YoY, better sales of the Jaguar Land Rover business helped pull the overall consolidated revenues up. As far as the Indian operations are concerned, as per the company, sluggish economic activity, weak macro environment affected freight availability which in turn put pressure on volumes in the M&HCV segment (which forms a huge chunk of the sales volumes). Revenues from the passenger vehicles business was also adversely impacted on account of the slowdown and intense competition.

  • Commercial vehicles sales for the quarter stood at 138,963 units, higher by a mere 6% YoY. This was largely led by the healthy 34% YoY growth in LCVs, even as volumes of MHCVs plunged 38% YoY. At the end of the quarter, the company's market share in commercial vehicles space stood at 62.6%. Tata Motors' passenger car sales in the domestic market (including Fiat and Jaguar Land Rover vehicles) plunged 36% YoY to 54,675 units during the quarter. The company's market share in this space stood at 10.1% for the period till December 2012.

  • As for JLR's global sales, volumes grew by 10% YoY to 94,828 units, largely led by Range Rover Evoque and Freelander. JLR business revenues grew by 11% YoY during the quarter. In terms of geographies, China continued to grow strongly accounting for 21% of wholesale volumes (as against 17.5% in 3QFY12).

    Segmental performance (Consolidated)
    (Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
    Tata and other brands* 148,392 123,452 -17% 422,473 379,685 -10%
    % of sales 33% 27%   37% 28%  
    PBIT 8,196 1,379 -83% 26,202 16,401 -37%
    PBIT margins 5.5% 1.1%   6.2% 4.3%  
    Jaguar and Land Rover 301,460 334,567 11% 717,310 940,374 31%
    % of sales 66% 72%   62% 70%  
    PBIT 43,247 33,950 -21% 87,035 96,884 11%
    PBIT margins 14.3% 10.1%   12.1% 10.3%  
    Others 5,339 5,929 11% 13,901 16,705 20%
    % of sales 1% 1%   1% 1%  
    Total# 455,191 463,948 2% 1,153,683 1,336,764 16%
    *Includes vehicles / spares and financing thereof; #Excludes inter segment revenues

  • Tata Motors' consolidated operating profits fell by 17% YoY as operating margins dropped by 2.8% to 12.3% during the quarter. While raw material costs during the quarter fell by 1.9% to 64.4% of sales, there was an increase in staff costs, product development expenses and other expenditure (all as a percentage of sales). The latter especially increased on account of higher marketing spends in a highly competitive environment.

    Cost break-up...
    (Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
    Raw materials/ purchases 299,944 296,714 -1.1% 760,684 851,420 11.9%
    % sales 66.3% 64.4%   66.3% 64.1%  
    Staff cost 32,072 43,529 35.7% 86,652 121,617 40.3%
    % sales 7.1% 9.4%   7.6% 9.2%  
    Product development expenses 3,957 4,865 22.9% 9,546 14,937 56.5%
    % sales 0.9% 1.1%   0.8% 1.1%  
    Other expenditure* 48,360 59,214 22.4% 134,915 172,729 28.0%
    % sales 10.7% 12.8%   11.8% 13.0%  
    Total expenditure 384,333 404,322 5.2% 991,798 1,160,702 17.0%
    * including amount capitalized

  • Tata Motors' net profits plunged by 52% YoY. This fall was steeper than that in operating profits on account of higher interest costs and depreciation charges. Excluding extraordinary items during both the periods, net profits fell by 49.5% YoY.

What to expect?
At the current price of Rs 304, the stock trades at a multiple of 15.6 times our estimated FY15 cash flow per share on a standalone basis. Going forward, although the company has observed demand pressure for MHCVs, LCVs are expected to grow at a healthy pace. On the passenger vehicles front, headwinds will continue to exist in the form of intense competition, fuel price increases and increasing costs. The latter will especially be on higher marketing spends as the company aims to keep the demand for its products up against a highly competitive backdrop. Tata Motors also intends to improve distributions, customer engagement levels as well as refresh products. As far as JLR is concerned, focus will be on investments in future capacities, new products and technologies. In light of the current valuations, we have a 'Sell' view on the stock.

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