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Tata Motors: A bumpy ride - Views on News from Equitymaster
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Tata Motors: A bumpy ride
Jun 1, 2009

Performance summary
  • Full year topline falls 11% YoY on the back of a 14% decline in volumes.
  • Operating margins slide 3.4% as higher costs take their toll.
  • Bottomline for the full year falls 51%, mainly on the back of poor operating performance. PBT, which excludes the impact of exceptional items, suffers a fall of 55% YoY during the fiscal.
  • The company has announced a dividend of Rs 6 per share on ordinary shares and Rs 6.5 per share on ‘A’ shares for the full year FY09.

(Rs m) FY08 FY09 Change
Units sold (excl.traded vehicles) 585,649 506,421 -13.5%
Net sales 287,394 256,608 -10.7%
Expenditure 258,078 239,084 -7.4%
Operating profit (EBDITA) 29,316 17,524 -40.2%
EBDITA margin (%) 10.2% 6.8%  
Other income 4,832 9,260 91.6%
Interest (net) 2,824 6,737 138.6%
Depreciation 7,167 9,257 29.2%
Profit before tax 24,157 10,790 -55.3%
Extraordinary income/(expense) 1,607 (653)  
Tax 5,476 125 -97.7%
Profit after tax/(loss) 20,289 10,013 -50.7%
Net profit margin (%) 7.1% 3.9%  
No. of shares (m) 385.5 514.1  
Diluted earnings per share (Rs)*   19.5  
Price to earnings ratio (x)*   17.1  
(* on trailing twelve months earnings)

What has driven performance in FY09?
  • As mentioned above, a 14% drop in volumes (excl. traded vehicles) was responsible for the 11% drop in topline that the company suffered during the fiscal. Although all the segments barring the LCVs witnessed lower sales, M&HCV segment was the worst hit with a 32% drop in volumes. The weakness was largely a result of subdued economic activity, especially during the second half of the fiscal. The LCV segment however, continued to ride on the success of its ‘Ace’ range of vehicles and also the ‘Winger’.

  • As far as the passenger vehicles are concerned, company’s domestic sales suffered a fall of 5% during the year under review. While UVs witnessed a fall of 18%, passenger car sales were down by a little more than 1%. While high interest rates, unavailability of finance and economic slowdown impacted volumes in both the segments adversely, the company’s UV sales also suffered on account of the ad-hoc duty imposed on this segment in July last year. In the car segment, while the launch of Nano and fully ramped up Indica Vista capacity is likely to boost volumes in the small car segment, a launch of a new Indigo platform will further strengthen TML’s position in the mid-sized car segment.

  • The export volumes of the company registered a sharp decline of nearly 39% during FY09, due to global economic slowdown and credit crunch, especially in prime markets, which witnessed adverse impact on automotive demand.

    cost break up
    (Rs m) FY08 FY09 Change
    Raw materials 202,307 186,370 -7.9%
    % sales 70.4% 72.6%  
    Staff cost 15,446 15,514 0.4%
    % sales 5.4% 6.0%  
    Other expenditure 40,326 37,200 -7.8%
    % sales 14.0% 14.5%  

  • Tata Motor’s operating margins suffered a fall of 3.4% YoY during FY09. All the three major cost heads have contributed to this fall. However, the biggest impact has been caused by the raw material expenses, which have increased by 2.2% as a percentage of sales. Although prices of many commodities were ruling at multi year highs a couple a few quarters back, thus accounting for fall in operating margins, the same have seen some respite during the fourth quarter and should they remain at same levels, operating margins might get restored to earlier levels. The company has also done well to cut costs to the tune of Rs 3.2 bn, another factor that will stand it in good stead in the coming quarters.

    (Units) FY07 FY08 FY09 (change)*
    M&HCV 173,381 166,037 113,674 -31.5%
    LCV 125,792 147,334 151,338 2.7%
    Utility Vehicles 47,893 47,700 39,295 -17.6%
    Cars 179,000 170,355 168,217 -1.3%
    M&HCV 11,560 13,363 9,337 -30.1%
    LCV 23,412 26,100 17,157 -34.3%
    Utility Vehicles 1,416 2,599 678 -73.9%
    Cars 16,408 12,210 6,238 -48.9%
    M&HCV 184,941 179,400 123,011 -31.4%
    LCV 149,204 173,434 168,495 -2.8%
    Utility Vehicles 49,309 50,299 39,973 -20.5%
    Cars 195,408 182,565 174,455 -4.4%
    Grand total 578,862 585,698 505,934 -13.6%

  • Fall in company’s profit before tax (PBT) has come in at 55% YoY. This is higher than the fall in operating profits due to a more than two fold jump in interest expenses and also a 29% rise in depreciation charges. Although other income has grown by 92%, it has not been enough to offset the other two and hence the higher fall in the PBT.

  • Thus, on account of the 55% fall in PBT and an extraordinary expense to the tune Rs 65 m, one would have expected the bottomline to fall even further than the PBT. Especially when one considers the Rs 1.6 bn extraordinary income that the company earned during FY08 as opposed to a loss this time around. However, at 51%, the fall in bottomline has come in even lower than the PBT, due mainly to a huge 98% fall in tax outgo. Factors like weighted deduction on R&D expenses, production from tax free zones and a greater proportion of non-core income which attracts lower taxes, have combined together to lead to such a drastic fall in tax expenses. Furthermore, the bottomline was also helped by the change in forex accounting rules as a result of which PBT was higher by Rs 5.2 bn.

What to expect?
At the current price of Rs 336, the stock trades at a multiple of 6.3x our estimated FY11 cash flow per share. The company’s earnings have come in 21% below our estimates, and at 6.8%, the company’s operating margins have come in much below our estimates of 8%. However, with cost pressures easing, we are hopeful that going forward, margins should climb back to the 8%-9% levels. This, apart from the improved macroeconomic scenario, should improve the company’s earnings power over the next 2-3 years. We remain positive on the stock from a medium term perspective.

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