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Tata Motors: A well-rounded FY07! - Views on News from Equitymaster
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Tata Motors: A well-rounded FY07!
May 18, 2007

Performance Summary
Tata Motors, India’s largest manufacturer of commercial vehicles has announced its fourth quarter and full year FY07 results. Despite little pressure on margins, the company has managed to close the year on a high. On a standalone basis, while the topline has grown by 20% YoY for the final quarter, bottomline growth has come in at a slightly higher 28% YoY. Operating margins have however shrunk by 90 basis points. For the full year, the topline growth stood at 34%, while the bottomline has managed to grow by 25%, both on a YoY basis. Operating margins have shrunk here as well, registering a decline of 50 basis points (0.5%). As far as the consolidated performance for the full year is concerned, while revenues (net of excise) have grown by 36% YoY, net profit growth has stood at a lower 26% YoY.

Standalone financials
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Units sold 148,164 171,926 16.0% 454,345 579,378 27.5%
Net sales 68,828 82,670 20.1% 206,022 275,352 33.7%
Expenditure 60,428 73,293 21.3% 180,963 243,065 34.3%
Operating profit (EBDITA) 8,399 9,377 11.6% 25,059 32,287 28.8%
EBDITA margin (%) 12.2% 11.3%   12.2% 11.7%  
Other income 44 604 1267.4% 2,891 2,452 -15.2%
Interest (net) 692 598 -13.6% 2,264 3,131 38.3%
Depreciation 1,363 1,583 16.1% 5,209 5,863 12.5%
Extraordinary income/(expense)       57 (14) -123.9%
Profit before tax 6,389 7,801 22.1% 20,477 25,745 25.7%
Tax 1,895 2,031 7.2% 5,245 6,597 25.8%
Profit after tax/(loss) 4,494 5,771 28.4% 15,289 19,135 25.2%
Net profit margin (%) 6.5% 7.0%   7.4% 6.9%  
No. of shares (m) 382.8 385.3   382.8 385.3  
Diluted earnings per share (Rs)* 46.7 59.9   39.7 49.7  
Price to earnings ratio (x)**         14.9  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Tata Motors (Telco) is India's largest commercial vehicle (M/HCVs and LCVs) manufacturer, with a market share of 62% in FY06 (59% in FY04) and second largest producer of passenger vehicles. Its plants are located at Pune, Jamshedpur and Lucknow. From a net loss of Rs 5 bn in FY01 to a profit of Rs 19 bn in FY07, the company has come a long way. It acquisition of the CV division of South Korean auto major Daewoo (in FY04) 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 FY07?
Cars play spoilsport in 4QFY07: Tata Motors sold 16% more vehicles during 4QFY07 than it managed during same quarter last year. However, this is much lower than the 33% YoY growth in overall volumes, attained during the first nine months of FY07. As a consequence, volume growth for the full year dropped by 28% YoY. Cars seemed to be the raison d’etre for the relatively subdued performance during the fourth quarter as domestic volumes here grew by just 10% YoY, less than half of the 23% YoY growth it achieved in first nine months. With competitors, especially Maruti, invading the diesel space, previously dominated by Tata’s Indica, volumes have taken a hit. Market share for the full year, however, remained constant, thanks mainly to the robust growth in the first nine months. With utility vehicles also improving its domestic volumes by an impressive 26% YoY, FY07 turned out to be another record year for the passenger vehicle division.

Commercial vehicles also witnessed robust growth and here too, the company achieved record volumes for the full year. Further, just like the car division, the fourth quarter turned out to be a small contributor to volume growth as domestic volumes improved by just 22% YoY, as opposed to a stellar 48% YoY growth for the first nine months. As a consequence, overall CV volumes grew by 39% YoY for the full year, an impressive growth nonetheless. It should be borne in mind that with interest rates hardening, all the segments of the company barring UVs, have turned in lower volumes during the final quarter.

If we were to break the CV segment further, it is the LCV segment, driven by its immensely successful ‘Ace’ that contributed more towards the growth in the overall CV segment for the full year by growing at a strong rate of 46% YoY. The mini truck has now been extended across the country, and a new variant, ACE HT, has also been launched. Growth in the M&HCV segment was also impressive, as it stood at 35% YoY for the full year. The domestic CV segment has been enjoying some strong tailwinds in recent times and Tata Motors is at the forefront of this wave as it further consolidated its market share in the segment to 64% in FY07 as opposed to 61% in FY06.

On the exports front, while M&HCV sales impressed, all the other segments have put up a disappointing show, leading to the exports growing by a modest 6% on a YoY basis for the full year.

Volumes: All round growth!
(Units) 4QFY06 4QFY07 %change FY06 FY07 %change
M&HCV 43,069 51,076 18.6% 128,714 173,381 34.7%
LCV 28,415 36,399 28.1% 86,236 125,792 45.9%
Utility Vehicles 12,985 16,543 27.4% 37,905 47,893 26.4%
Cars 48,361 53,340 10.3% 150,951 179,000 18.6%
M&HCV 2,691 3,607 34.0% 8,249 12,024 45.8%
LCV 6,613 5,849 -11.6% 21,848 23,466 7.4%
Utility Vehicles 771 221 -71.3% 1,881 1,414 -24.8%
Cars 5,259 4,891 -7.0% 18,561 16,408 -11.6%
M&HCV 45,760 54,683 19.5% 136,963 185,405 35.4%
LCV 35,028 42,248 20.6% 108,084 149,258 38.1%
Utility Vehicles 13,756 16,764 21.9% 39,786 49,307 23.9%
Cars 53,620 58,231 8.6% 169,512 195,408 15.3%
Grand total 148,164 171,926 16.0% 454,345 579,378 27.5%

Margins – A small hit: While the company’s operating margins have contracted by 90 basis points during the fourth quarter, it is nothing short of impressive if one takes into account the kind of pressures its two-wheeler counterparts are under. This is also an indicator of superior bargaining power, both at the customer as well as the supplier end. In terms of cost heads, it is mainly the higher raw material expenses that have put pressure on margins. Margins for the full year have also fallen, albeit by a lower 50 basis points and once again, driven mainly by higher raw material costs.

(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Raw materials 48,061 58,554 21.8% 140,070 190,253 35.8%
% sales 69.8% 70.8%   68.0% 69.1%  
Staff cost 3,141 3,647 16.1% 11,431 13,678 19.7%
% sales 4.6% 4.4%   5.5% 5.0%  
Other expenditure 9,226 11,092 20.2% 29,462 39,135 32.8%
% sales 13.4% 13.4%   14.3% 14.2%  

The bottomline growth during the quarter at 28% YoY has come in higher than the growth in operating profits. This has been driven mainly by a near 14 fold jump in other income, relating mainly to forex-based gains. Fall in interest expenses to the tune of 14% YoY and a moderate growth in tax outgo has also helped matters. For the full year though, growth in bottomline has come in at a lower than operating profit growth rate of 29% YoY, as other income has fallen by 15% and finance costs have also risen by 38% YoY. Sell of a stake in subsidiary during last fiscal helps explain why the other income has risen for the quarter and fallen for the full year on a YoY basis.

What to expect?
At the current price of Rs 742, the stock is trading at a multiple of 9 times our estimated FY09 cash earnings. While on a standalone basis, the stock is not trading at a significant discount to its fair value estimate of Rs 830 per share, if one includes the value of its subsidiaries, then the fair value touches Rs 996, resulting into a strong 16% CAGR in its share price from an FY09 perspective. We continue to stick with our view.

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