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Tata Motors: JLR saves the day - Views on News from Equitymaster

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Tata Motors: JLR saves the day
Jun 24, 2014

Tata Motors has announced its results for the quarter ended March 2014 recently. While revenues grew by 17% YoY, growth in net profits was flat on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Net sales grow by 16.6% YoY on a consolidated basis during the quarter largely on account of strong performance by Jaguar Land Rover (JLR).
  • Operating margins improve by 1.3% to 15.3% YoY during the quarter on account of the decline in raw material costs and other expenditure (as percentage of sales).
  • Growth in net profits is flat on account of higher costs and depreciation charges and extraordinary expenses to the tune of Rs 4 bn. Excluding the impact of extraordinary items during both the periods, net profit growth stands at 10% YoY.

Consolidated financial snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 560,018 653,171 16.6% 1,887,927 2,328,337 23.3%
Expenditure 481,884 553,174 14.8% 1,641,967 1,979,960 20.6%
Operating profit (EBDITA) 78,135 99,998 28.0% 245,960 348,377 41.6%
EBDITA margin (%) 14.0% 15.3%   13.0% 15.0%  
Other income 1,786 2,548 42.7% 8,156 8,286 1.6%
Finance costs 9,691 16,676 72.1% 35,603 47,338 33.0%
Depreciation 23,463 31,255 33.2% 76,013 110,782 45.7%
Exceptional items 215 (4,086)   (6,027) (9,854)  
Profit before tax 46,981 50,530 7.6% 136,473 188,690 38.3%
Tax 8,848 10,969 24.0% 37,767 47,648 26.2%
Profit after tax/(loss) 38,132 39,561 3.7% 98,707 141,042 42.9%
Share of profits of associates 1,501 (173)   1,056 (537)  
Minority interest (178) (205)   (837) (595)  
Net profit after taxes 39,455 39,183 -0.7% 98,926 139,910 41.4%
Net profit margin (%) 7.0% 6.0%   5.2% 6.0%  
No. of shares (m)         3,189.9  
Diluted earnings per share (Rs)*         46.9  
Price to earnings ratio (x)*         9.5  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in FY14?
  • Tata Motors reported a revenue growth of 23% YoY for the year. The growth was mainly driven by JLR while the standalone entity posted a decline of 23% YoY.

  • For the standalone entity (Indian operations), the sales volumes (including exports) in both commercial and passenger segment considerably declined during the year. The domestic scenario remained weak due to slowdown in economic activity and a high interest rate environment. Besides, the domestic industry was adversely impacted on account of fuel price increases, lower fleet utilization, tight financing environment, lower vehicle resale prices and stagnant freight rates. In the M&HCV segment, the market share of the standalone entity improved by 1.6% YoY during the quarter on account of value added services and new launches. The passenger vehicles segment was also adversely impacted on account of the weak macro environment and intense competitive pressures.

  • The wholesale and retail sales volumes for JLR grew by 16% YoY each for the full year. Land Rover grew by 12% YoY during the year driven by the introduction of the new Range Rover Sport, full year sales of the new Range Rover and continued strong growth of Evoque. Growth of Jaguar was even better at 37% YoY led by the robust demand for XJ and XF models and the introduction of the new Jaguar F-type.

  • The overall operating margins improved by 2% to 15% YoY on account of lower raw material costs and other expenditure (as percentage of sales). The raw material cost declined to 61.7% during FY14 versus 63.6% in FY13. However, there was a substantial rise in staff costs, while product development costs stayed under control during the year.

    Cost break-up...
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Raw materials/ purchases 351,297 402,838 14.7% 1,200,881 1,435,864 19.6%
    % sales 62.7% 61.7%   63.6% 61.7%  
    Staff cost 44,346 60,273 35.9% 166,322 215,564 29.6%
    % sales 7.9% 9.2%   8.8% 9.3%  
    Product development expenses 5,279 7,766 47.1% 20,216 25,652 26.9%
    % sales 0.9% 1.2%   1.1% 1.1%  
    Other expenditure* 80,961 82,297 1.6% 254,549 302,879 19.0%
    % sales 14.5% 12.6%   13.5% 13.0%  
    Total expenditure 481,884 553,174 14.8% 1,641,967 1,979,960 20.6%

  • Led by the strong growth in revenues and operating profits, net profits grew by 41% YoY in tandem with the growth in operating profits.
What to expect?
At the current price of Rs 445, the stock trades at a multiple of 9.5 times its trailing twelve month earnings on a consolidated basis. The company's CV sales are expected to ramp up once the economy picks up. However, given the intense competitive pressure in passenger vehicles, the turnaround of this business is likely to remain gradual. One of the reasons why Tata Motors has lost market share in the PV segment is lack of new product launches as compared to its peers and the company is looking to correct this with the help of some new launches going forward. Thus, marketing costs are expected to stay high.

As far as JLR is concerned, sales momentum is likely to continue with new product launches. The management expects capital spending to increase to around GBP 3.5-3.7 bn for FY15. The company will be investing in new products and technologies as well as capacity expansion. We will be re-evaluating our estimates for the company and in light of the current valuations, we are of the view that investors should not buy the stock at the current price levels.

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