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Tata Motors: Zooming start to FY07 - Views on News from Equitymaster
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Tata Motors: Zooming start to FY07
Jul 25, 2006

Performance Summary
Tata Motors, India’s leading manufacturer of commercial vehicles and passenger cars, has had a good start to FY07, if the first quarter results are any indication. Buoyed by a 44% YoY increase in vehicles sold, the topline of the company has improved by 49% as compared to 1QFY06. Operating margins have, however, shrunk by 160 basis points on the back of higher input costs. Although interest costs have increased, higher other income has been more than able to offset the same thus enabling net profits to grow 40% YoY, a notch higher than the 30% growth in operating profits.

Financial performance: Standalone snapshot
(Rs m) 1QFY06 1QFY07 Change
No of units sold 87,499 126,154 44.2%
Net sales 38,781 57,834 49.1%
Expenditure 33,977 51,571 51.8%
Operating profit (EBDITA) 4,804 6,263 30.4%
EBDITA margin (%) 12.4% 10.8%  
Other income 583 859 47.4%
Interest (net) (510) (726) 42.2%
Depreciation 1,267 1,411 11.4%
Profit before tax 3,610 4,986 38.1%
Extraordinary income/(expense) - (4)  
Tax 873 1,164 33.3%
Profit after tax/(loss) 2,737 3,819 39.5%
Net profit margin (%) 7.1% 6.6%  
No. of shares (m) 244.7 383.0  
Diluted earnings per share (Rs)* 28.6 39.9  
Price to earnings ratio (x)**   16.2  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Tata Motors (Telco) is India's largest commercial vehicle (M/HCVs and LCVs) manufacturer, with a market share of 62% in FY06 (59% in FY04) and second largest producer of passenger vehicles. Its plants are located at Pune, Jamshedpur and Lucknow. From a net loss of Rs 5 bn in FY01 to a profit of Rs 15 bn in FY06, the company has come a long way. It recently acquired the CV division of South Korean auto major Daewoo and this is likely to help the company to augment growth in the higher tonnage CVs, an area that holds considerable promise in the future

What has driven performance in 1QFY07?
Growth across all segments: The stellar performance of the company can be gauged from the fact that the growth in domestic sales volumes has been higher than industry in almost all the segment. In the CV segment, the company’s sales have grown by 59% YoY for the M&HCV type of vehicles (industry grew by 52%) and by 86.4% for LCVs (industry grew by 40%). The robust performance of its LCV division could be attributed to the continued success of its latest offering ‘Ace’. It should be noted that in view of high demand, the company has doubled the annual capacity of ‘Ace’ to 60,000 and the incremental growth in volumes seems to be a factor of this increased capacity. In addition to increased economic activity, the recent ban on overloading of trucks also seems to be playing its part in the enthusing performance of its M&HCV division. Having said that, Tata Motors reported a 20% fall in M&HCV volumes in the first quarter of FY06 and consequently, the growth numbers in 1QFY07 are inflated. The decline in volumes last year was due to supply-related issues as well as lower offtake on account of adverse monsoons in certain states of the country.

On the passenger car front, after losing market share in FY06, the company seems to have come back in the reckoning as a 23% rise in volumes was almost neck to neck with the industry growth rate of 24%. The company had introduced the petrol version of its successful passenger car Indica towards the fag end of the previous fiscal and it looks like the move is paying dividends if the growth in volumes is any indication. UV sales have also outperformed the industry growth of 8% and have grown 15% over corresponding previous quarter. Tata Motors is working on a new UV platform and this is likely to further augment the growth in this segment.

Exports have also registered a sharp jump (up 45% YoY). Thus, ably supported by both domestic as well as exports sales, volumes of the company grew 44% over corresponding previous quarter.

Volumes - Notice the decline in 1QFY06?
(Units) 1QFY05 1QFY06 1QFY07 (change)*
Domestic
M&HCV 21,993 22,999 36,607 59.2%
LCV 16,238 14,237 26,535 86.4%
Utility Vehicles 7,344 7,343 8,417 14.6%
Cars 33,848 33,847 41,489 22.6%
Exports
M&HCV 1,389 1,389 2,273 63.6%
LCV 4,056 4,325 5,462 26.3%
Utility Vehicles 87 67 506 655.2%
Cars 1,586 3,292 4,865 47.8%
Total
M&HCV 23,382 24,388 38,880 59.4%
LCV 20,294 18,562 31,997 72.4%
Utility Vehicles 7,431 7,410 8,923 20.4%
Cars 35,434 37,139 46,354 24.8%
Grand total 86,541 87,499 126,154 44.2%
(*1QFY07 upon 1QFY06)

Raw material price inflation hurts operating margins: All the auto companies that have so far announced results this quarter have witnessed raw material cost pressure and Tata Motors has been no different. Raw material cost as a percentage of sales have increased by 230 basis points. Despite a lower wage outgo, the operating margin has contracted by 160 basis points. Higher product development costs in view of the aggressive capex that the company is planning to incur over the next few years have also affected margins negatively.

Cost break-up…
(Rs m) 1QFY06 1QFY07 Change
Raw materials 25,123 38,797 54.4%
% sales 64.8% 67.1%  
Staff cost 2,759 3,024 9.6%
% sales 7.1% 5.2%  
Other expenses 6,095 9,749 60.0%
% sales 15.7% 16.9%  

The other income kicker: Capital seems to have become costly for the company, as its interest bill has risen by 42%. However, this did not have an impact on bottomline, as other income jumped by 47% YoY. As a result of the higher other income, growth in bottomline at 40% YoY has been higher than the operating profit growth of 30% YoY.

What to expect?
At the current price of Rs 701, the stock is trading at a rich price to earnings multiple of 10 times our estimated FY08 cash earnings. We believe the current growth in volumes is unlikely to sustain itself in the coming quarters on account of rising fuel prices and interest rate hikes, especially on the CV front. Also, the company is expected to undertake a heavy capital-spending program, which will further strain cash flows. As such, we remain cautious on the stock in the near term.

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