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Tata Motors: The other income boost - Views on News from Equitymaster

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Tata Motors: The other income boost

May 28, 2008

Performance summary
  • Standalone topline registers a growth of 4.3% YoY during the year, higher than the 0.6% YoY growth in volumes.
  • Operating margins fall 1.2% as expenses increase at a faster rate than the topline.

  • Significant increase in other income and fall in interest expenses help bottomline grow by 6% YoY for the full year despite adverse operating performance

  • Consolidated profits remain virtually stagnant despite 10% YoY growth in topline for the full year. Recommends a dividend of Rs 15 per share for FY08

Standalone results
(Rs m) FY07 FY08 Change
Units sold 578,862 582,401 0.6%
Net sales 274,048 287,308 4.8%
Expenditure 241,761 257,029 6.3%
Operating profit (EBDITA) 32,287 30,280 -6.2%
EBDITA margin (%) 11.8% 10.5%  
Other income 2,452 4,832 97.1%
Interest (net) 3,131 2,824 -9.8%
Depreciation 5,863 6,523 11.3%
Profit before tax 25,745 25,765 0.1%
Extraordinary income/(expense) (14)    
Tax 6,597 5,476 -17.0%
Profit after tax/(loss) 19,135 20,289 6.0%
Net profit margin (%) 7.0% 7.1%  
No. of shares (m) 385.4 385.5  
Diluted earnings per share (Rs)* 49.6 52.6  
Price to earnings ratio (x)** 11.3   
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY08?
  • The company faced multiple headwinds in FY08 in the form of a high interest rate regime, high base effect and lower industrial growth. Consequently, the company’s overall volumes could manage growth of just 0.6% over FY07. If one were to consider the geographical split, while domestic sales remained virtually flat, exports volumes were higher by 2% YoY.

  • Volumes in the domestic market were led by LCVs, where a couple of new launches helped company grow its sales by 17% YoY. Its other segments however recorded negative growth rates. In passenger vehicles, despite industry growth rate of 11%, the company’s sales suffered a fall of % YoY, due largely to its mature product portfolio, especially in passenger cars. In the M&HCV space too, the company faced deceleration to the tune of 4% YoY. Infact, had it not been for the robust growth in the passenger M&HCV space, the decline would have been even worse. Profitability of the truck operators remained weak during the fiscal and hence, the segment witnessed subdued sales.

  • The company faced pressure on the exports front also, led largely by passenger vehicles, where sales were down 17% YoY. The CV division, where volumes were higher by 12% YoY, helped company save face, thus restricting the overall decline to 2% YoY.

  • In value terms, topline growth at 4% YoY came in higher than the volume growth on account of larger proportion of high value products as also some of the price hikes that the company had taken during the fiscal.

    The volumes story…
    (Units) 4QFY06 4QFY07 4QFY08 (change)* FY06 FY07 FY08 (change)*
    M&HCV 43,060 51,076 53,166 4.1% 128,714 173,381 166,037 -4.2%
    LCV 28,415 36,399 44,675 22.7% 86,236 125,792 147,334 17.1%
    Utility Vehicles 12,985 16,543 16,733 1.1% 37,905 47,893 47,700 -0.4%
    Cars 48,361 53,340 46,889 -12.1% 150,951 179,000 167,058 -6.7%
    M&HCV 2,691 3,607 3,439 -4.7% 8,249 11,560 13,363 15.6%
    LCV 6,613 5,849 7,478 27.9% 21,848 23,412 26,100 11.5%
    Utility Vehicles 771 221 359 62.4% 1,881 1,416 2,599 83.5%
    Cars 5,259 4,891 2,733 -44.1% 18,561 16,408 12,210 -25.6%
    M&HCV 45,751 54,683 56,605 3.5% 136,963 184,941 179,400 -3.0%
    LCV 35,028 42,248 52,153 23.4% 108,084 149,204 173,434 16.2%
    Utility Vehicles 13,756 16,764 17,092 2.0% 39,786 49,309 50,299 2.0%
    Cars 53,620 58,231 49,622 -14.8% 169,512 195,408 179,268 -8.3%
    Grand total 148,155 171,926 175,472 2.1% 454,345 578,862 582,401 0.6%
    (*4QFY08 upon 4QFY07 and FY08 upon FY07)
    LCV sales also include 'Winger' and 'Magic' sales

  • On the margins front, they were lower by 130 basis points as compared to FY07. The key culprit has been the raw material expenses, which increased by 100 basis points as a percentage of sales. Prices of key commodities continued to strengthen during FY08, putting pressure on margins. While the company did resort to some price hikes, it was not enough to offset the entire cost inflation. Staff costs also came in higher by 13% YoY, further straining margins.

    Cost break-up…
    (Rs m) FY07 FY08 Change
    Raw materials 190,253 202,307 6.3%
    % sales 69.4% 70.4%  
    Staff cost 13,678 15,446 12.9%
    % sales 5.0% 5.4%  
    Other expenditure 37,830 39,276 3.8%
    % sales 13.8% 13.7%  

  • Despite a 6% fall in operating profits, bottomline growth stood at 6% YoY. This was mainly due to the near doubling of other income. The company sold 15% stake in two of its subsidiaries viz. HV Axles Ltd (HVAL) and HV Transmissions Ltd (HVTL) and the gain realized from the same has been included in other income, thus giving it a boost. Lower interest costs to the tune of 10% also helped boost the bottomline performance. At the same time, an 11% higher depreciation, a result of greater capex and commissioning of new capacities, took some sheen off the bottomline growth, restricting it to 6% YoY for the full year.

  • As far as consolidated performance is concerned, its two key subsidiaries, viz. Tata Daewoo and TELCON continued with their robust performances, growing their bottomline by 91% and 76% on the back of 32% and 50% growth in topline respectively. Most of its other subsidiaries also continued to perform well.

What to expect?
At the current price of Rs 594, the stock is trading at 11 times its trailing 12-month standalone earnings. The company’s FY08 standalone net profits have come in just 1% below our estimates. Tata Motors is really gearing itself quite well for the competition both in the CV as well as the passenger vehicle space. But such a strategy will put a significant strain on its balance sheet. Furthermore, the segments that the company is present in are going through a structural change where it would be risky to assume that the profitability of past may continue well into the future. We will take all of these factors into account when we come out with our revised estimates.

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