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Tata Motors: Domestic business under pressure - Views on News from Equitymaster

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Tata Motors: Domestic business under pressure
Jun 1, 2012

Tata Motors announced the fourth quarter and full year results of financial year 2011-2012. The company’s consolidated revenues and net profits grow by 36% YoY and 46% YoY respectively during the year. Here is our analysis of the results.

Performance summary
  • Consolidated revenues rise by 36% YoY during FY12 largely led by growth from its Jaguar Land Rover business.
  • Revenues of Tata (and other brands; including spares and financing) increase by 18% YoY during the year, while JLR’s revenues grow by 42% YoY (not adjusted for intersegment revenues).
  • Consolidated operating profit growth at 33% YoY is lower than the growth in sales due to fall in operating margins to 13.5% during the year.
  • Consolidated profits grow at a faster clip of 46% YoY largely due to higher other income and tax credit received during the year.

Financial snapshot
  Standalone Consolidated
(Rs m) FY11 FY12 Change FY11 FY12 Change
Sales 470,884 543,066 15.3% 1,221,279 1,656,545 35.6%
Expenditure 424,233 501,290 18.2% 1,053,104 1,433,433 36.1%
Operating profit (EBDITA) 46,651 41,776 -10.5% 168,175 223,112 32.7%
Operating profit margin (%) 9.9% 7.7%   13.8% 13.5%  
Other income 4,230 5,741 35.7% 4,295 6,618 54.1%
Interest (net) 13,837 12,186 -11.9% 23,853 29,822 25.0%
Depreciation 13,608 16,067 18.1% 46,555 56,254 20.8%
Profit before tax 23,436 19,263 -17.8% 102,062 143,654 40.8%
Exceptional items (1,471) (5,852)   2,310 (8,315)  
Tax 3,847 988 -74.3% 12,164 (400)  
Share of profit in associates - -   1,014 249 -75.4%
Minority interest - -   (485) (823)  
Profit after tax/(loss) 18,118 12,422 -31.4% 92,736 135,165 45.8%
Net profit margin (%) 3.8% 2.3%   7.6% 8.2%  
No. of shares (m)   3,173.8     3,173.8  
Diluted earnings per share (Rs)*   5.8     45.2  
P/E ratio (x)*   40.6     4.9  
(*On a trailing 12-month basis)

What has driven performance in FY12?
  • Tata Motors’ consolidated revenues increased by 36% YoY during the year. The revenue growth was led by the standalone business (up 15% YoY) as well as the Jaguar Land Rover (JLR) business (up 42% YoY). The company’s standalone business was driven by the commercial vehicle segment, whose volumes increased by 16% YoY. This was lower than the domestic CV industry growth of 19% YoY during the year. Within the CV space, volumes were driven by the LCV segment (23% YoY) led by healthy agricultural output, increasing penetration into tier 2 and tier 3 cities and increasing rural and last mile connectivity. Volume growth in the MHCV segment was tepid at 5% YoY. High interest rates, fuel price hikes, and slowdown in economic growth moderated growth in the MHCV segment. Further, there was a slowdown in the bus market as orders received under JNNURM scheme were fulfilled. Thus, on excluding bus sales, CV sales grew by 20% YoY for FY12.

  • On the other hand, passenger vehicle and utility vehicle volumes (including JLR vehicles) in the domestic market grew by a lukewarm 4% YoY during the year on account of rising interest rates, fuel price hikes and intense competition. Growth was seen in the compact car segment as well as in utility vehicles and vans, while the mid size and executive car segment saw a decline in sales.

  • Growth in exports (up 8.6% YoY) was subdued during the year largely led by CV volumes as growth in passenger cars remained flat. Tata Motors’ market share in the commercial vehicle space stood at 59.4% for FY12 while that in passenger vehicles was 13.1%. The company took cumulative price increase of 3% each on commercial vehicles and passenger vehicles during the year.

  • As for the JLR business, net revenues grew by 37% YoY during the year (in GBP terms). In terms of products, growth was led by Land Rover as the response to the new launch Range Rover Evoque has been positive. In terms of geographies, growth was led by China and other emerging markets as the UK and North America witnessed a dip in sales.

    Segmental performance (Consolidated)
    (Rs m) FY11 FY12 Change
    Tata and other brands* 507,997 599,212 18%
    % of sales 41% 36%  
    PBIT 42,741 41,520 -18%
    PBIT margins 8% 7%  
    Jaguar and Land Rover 704,673 1,047,509 42%
    % of sales 57% 63%  
    PBIT 77,508 123,595 52%
    PBIT margins 11% 12%  
    Others 15,305 19,486 27%
    % of sales 1% 1%  
    Total# 1,227,975 1,666,208 32%
    *Includes vehicles / spares and financing thereof;
    #Excludes inter segment revenues

  • As far as the standalone business is concerned, operating margins plunged 2.2% to 7.7% during the year on account of higher raw material costs and other expenditure (as percentage of sales). Besides higher input costs, the company also spent more on marketing spends in the passenger car business to ramp up visibility as its market share was falling. The company had upped prices during the year which helped in softening the pressure from high input costs to some extent. Tata Motors’ consolidated operating profits grew by 33% YoY and were lower than the growth in sales as operating margins fell by 0.3% to 13.5% during the year.

    Cost break-up...
      Standalone Consolidated
    (Rs m) FY11 FY12 Change FY11 FY12 Change
    Raw materials 340,674 397,049 16.5% 790,084 1,094,676 38.6%
    % of sales 72.3% 73.1%   64.7% 66.1%  
    Staff cost 22,940 26,915 17.3% 93,427 122,985 31.6%
    % of sales 4.9% 5.0%   7.6% 7.4%  
    Product development expenses 1,412 2,343 65.9% 9,976 13,892 39.3%
    % of sales 0.3% 0.4%   0.8% 0.8%  
    Other expenditure* 59,207 74,984 26.6% 159,618 201,880 26.5%
    % of sales 12.6% 13.8%   13.1% 12.2%  
    Total 424,233 501,290 18.2% 1,053,104 1,433,433 36.1%
    *Including amount capitalised

  • On a standalone basis, net profits fell by 31% YoY. On excluding exceptional items during both the years, net profits fell by 7% YoY. This was largely due to the poor performance at the operating level. Substantial fall in tax expanses, however, helped blunt the total impact somewhat. Tata Motors’ consolidated net profits grew by 46% YoY during the year helped by higher other income and tax credit received during FY12.

What to expect?
At the current price of Rs 223, the stock is trading at a multiple of 4.9 times its trailing twelve month consolidated earnings per share. Going forward, demand could be impacted by slower industrial growth and a weak economic outlook. However, the company expects interest rates to moderate. The company has observed demand pressure for MHCVs but opines that a good monsoon and increase in infrastructure spending could propel demand for MHCV trucks. 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 company expects customer preference to continue for diesel vehicles. Overall, the company intends to launch new products both in the CV and passenger vehicles space. As far as JLR is concerned, focus will be on investments in future capacities, new products and technologies. The company has outlined a capex of about GBP 2 bn in FY3 for JLR. Overall, we maintain our negative view on the stock.

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