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Tata Motors: Subdued fourth quarter - Views on News from Equitymaster
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Tata Motors: Subdued fourth quarter
Jun 17, 2015

Tata Motors has announced its results for the fourth quarter ended March 2015 recently. Revenues grow by 3.5% YoY, while net profits fall by 56% YoY on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Net sales grow by 3.5% YoY on a consolidated basis led by the growth in the Indian operations.
  • Operating margins contract by 2.8% to 12.5% YoY during the quarter on account of the substantial rise in other expenditure (as percentage of sales).
  • Net profits fall by 56% YoY on account of the poor performance at the operating level, higher depreciation charges and interest costs.

Consolidated financial snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 653,171 675,760 3.5% 2,328,337 2,627,963 12.9%
Expenditure 553,168 591,377 6.9% 1,979,803 2,235,577 12.9%
Operating profit (EBDITA) 100,003 84,383 -15.6% 348,534 392,387 12.6%
EBDITA margin (%) 15.3% 12.5%   15.0% 14.9%  
Other income 2,548 2,452 -3.8% 8,286 8,987 8.5%
Finance costs 16,681 18,946 13.6% 47,494 48,615 2.4%
Depreciation 31,255 38,568 23.4% 110,782 133,886 20.9%
Exceptional items (4,086) (1,612)   (9,854) (1,847)  
Profit before tax 50,530 27,710 -45.2% 188,690 217,026 15.0%
Tax 10,969 10,236 -6.7% 47,648 76,429 60.4%
Profit after tax/(loss) 39,561 17,474 -55.8% 141,042 140,597 -0.3%
Share of profits of associates (173) 30    (537) 134  
Minority interest (205)  (339)    (595)  (868)  
Net profit after taxes 39,183 17,165 -56.2% 139,910 139,863 0.0%
Net profit margin (%) 6.0% 2.5%   6.0% 5.3%  
No. of shares (m)         3,218.9  
Diluted earnings per share (Rs)*          44.0  
Price to earnings ratio (x)*          9.8  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 4QFY15
  • Tata Motors reported a revenue growth of 3.5% YoY for the quarter. The growth was largely led by the Indian operations (up 26% YoY) as growth in JLR slowed down (up 9% YoY in GBP terms).

    For the standalone entity (Indian operations), the sales volumes (including exports) of commercial vehicles remained flat during the quarter. However, this was largely on account of the dip in volumes of light commercial vehicles (LCVs). Constraints on financing and over capacity impacted the demand for the LCV segment. Having said that, the performance of the medium & heavy CV (MHCV) segment was very strong as volumes were up 26% YoY during the quarter. The strong performance of this segment was attributed to positive business sentiment, firm freight rates, improved profitability of fleet operators and replacement demand in the big truck segment. For the full year, Tata Motors' market share in commercial vehicles stood at 49.7%. For the full year, however, volumes of commercial vehicles dipped by 13% YoY largely led by the weakness in the LCV industry.

  • The passenger vehicles segment saw growth of 19% YoY for the quarter led by positive response from the market for its newly launched models Zest and Bolt. In the passenger vehicles segment, Tata Motors' market share stood at 6%. For the full year, volumes of passenger vehicles declined by 5% YoY.

  • As far as JLR is concerned, for the full year, the volumes of Land Rover were up 9% YoY led by growth across most models. Those of Jaguar were down by 4.5% YoY. In this, XF and XJ saw declining volumes in advance of the new XF on sale later this year. In terms of geographies (in wholesale volume terms), good growth was seen in China and the UK, which accounted for 25.4% and 18.7% of sales respectively during the year as against 24.2% and 19.2% respectively in FY14.

  • The overall operating margins contracted by 2.8% to 12.5% during the quarter largely on account of the rise in other expenditure (as percentage of sales). This was on account of mark-to market losses on unrealized hedges. Thus, operating profits fell by 16% YoY. For the full year, operating margins remained stable at 15%; thus, operating profits grew by 12.6% YoY in tandem with the growth in revenues for the full year.

  • Net profits (excluding extraordinary items) fell by 56% YoY during the quarter on account of poor performance at the operating level, higher depreciation charges and interest costs.
What to expect?

At the current price of Rs 431, the stock trades at a multiple of 9.8 times its trailing twelve month earnings on a consolidated basis (excluding extraordinary items). Tata Motors expects the volumes of MHCVs to be more comprehensive and sustainable in FY16. However, growth in this segment will be more pronounced in the second half of FY16, while the recovery is likely to remain weak in the first half. Meanwhile, JNNURM Phase 2 orders are expected to boost bus volumes. In the passenger vehicles space, the company has a slew of launches lined up, which is a positive sign. According to the company, it has outlined a product plan till 2020 as per which 2 new vehicle launches will be slated every year.

As far as JLR is concerned, the company has lined up new product launches over the next 18 months, which include the Jaguar XF, F-Pace among others. The company will be investing in new products and technologies as well as capacity expansion.

We value Tata Motors using the sum of the parts (SOTP) method. Since, it has become quite difficult to take a call on the profitability of the standalone operations of Tata Motors, we have valued this business using the price to sales multiple. Consequently, we have used a price to sales multiple of 1x to value standalone Tata Motors. To this, we have added the value of JLR (valued using an EV/EBIT multiple of 8x) which works out to Rs 181 per share (after factoring in the rights issue). Thus, the total value for the company for FY17 stands at Rs 331 per share. Thus, our view is that investors not buy the stock of Tata Motors at the current price levels.

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