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Tata Motors: Size does not matter! - Views on News from Equitymaster

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Tata Motors: Size does not matter!
Mar 9, 2006

Post the loss in FY01, Tata Motors has come a long way to register a profit of Rs 12 bn in FY05 (Rs 16 bn in FY06E). While an upturn in the fortunes of the domestic automobile industry, of course, has played a vital role in this, the proactiveness and consistent efforts of the management in improving the efficiency also had a significant hand in this transformation. In this article, we compare Tata Motors’ performance with that of General Motors, the largest carmaker in the world. General Motors: General Motors Corporation (GMC), incorporated in 1908, is engaged in the design, manufacture, and marketing of cars and light trucks worldwide. It operates through Automotive, and Financing and Insurance Operations (FIO) segments. The Automotive segment is engaged in the designing, manufacturing, and marketing passenger cars, trucks, and locomotives The FIO segment provides a range of financial services. The company has partnerships with Fiat Auto SpA of Italy; DaimlerChrysler AG of Germany; and Fuji Heavy Industries, Ltd., Isuzu Motors, Ltd., and Suzuki Motor Corp. of Japan.

Tata Motors: Tata Motors (TML) is India's largest commercial vehicle (M/HCVs and LCVs) manufacturer with a market share of 65% (59% in FY04) and second largest producer of passenger vehicles. Its plants are located at Pune, Jamshedpur and Lucknow. It 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. Recently, it entered into an agreement with Fiat for global alliance.

Financials…
Rs in m (except per share data) Tata Motors* General Motors**
Units sold (000s) 399 8,241
Sales 174,191 8,669,562
5 year CAGR 26.5% 1.2%
Other Income 3,767 72,262
Operating profits 19,600 1,286,118
OPM 11.3% 14.8%
Depreciation 4,502 696,013
Interest 2,208 536,704
Net Profits 12,370 125,664
NPM 7.1% 1.4%
EPS 32 222
CEPS 47 1,450
*FY05 **CY04

As can be seen in the table above, GM is 50 times the size of Tata Motors in terms of sales. Also, on the operating margins front, the global leader is ahead of TML. However, at the net profit level, TML is way ahead of GMC. It should be noted that TML operates in an environment, which is not only competitive, but also a highly taxed one. On an average, duties and taxes account for almost 1/3rd of the selling price of an automobile manufactured in India. To put this in perspective, cost of raw materials accounted for 69% of net revenues in case of TML as compared to 63% for GMC. Given the fact that the Indian government has announced a reduction in duties on compact cars, there exists upside in the margins of Tata Motors.

Efficiency ratios Tata Motors* General Motors**
RONW 30.1% 10.1%
ROCE 22.1% 16.3%
Sales/GFA 2.6 2.5
Sales/employee (Rs m) 8 27
*FY05 **CY04

On the return-ratios front, the Indian company has comprehensively outperformed the global player indicating better utilisation of resources. On efficiency front, we believe that TML is atleast at par with the global giant. Inspite of the huge difference in the size and the fact that GMC is renowned for its technological prowess and higher automation, the asset turnover ratios are almost similar. While on the sales to employee basis, GMC appears to be performing better than TML, when the ratio is calculated in the local currency of the respective companies, Tata Motors scores over GMC (the ratio stands at 0.6 m per employee for GMC in $ terms).

Thus as can be judged from above, the Indian company, though miniscule in size, has better performance matrix on most of the parameters. Having said that, the performance of Tata Motors should be viewed in light of the upturn in the demand for automobiles. To give a perspective, during FY01-05, the demand for commercial vehicles has grown by 19% CAGR and that of passenger cars by 11% CAGR. At the same time, GMC, not only had to face increasing competition from Asian players but also the domestic demand was not robust in the US. At the same time rising employee costs (including retirement liabilities) also affected the performance of the global player. Nonetheless, this does not take away the credit from the Tata Motors management, which has managed to create wealth for its shareholders over the last few years.

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