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Tata Motors: Signs of a turnaround?
Jul 27, 2009

Performance summary
  • Standalone sales fall by 8% YoY during 1QFY10, led by 4% YoY decline in volumes (units sold). While domestic volume sales declined by a marginal 1.4% YoY, it was the pressure on exports (down 43% YoY) that led to the decline in overall volumes during the quarter.
  • Domestic sales of commercial vehicles grew by 1.1% YoY during the quarter, thereby helping the company improve its market share to 67.4%, from 61% in 1QFY09. Volume sales of passenger vehicle declined by 5% YoY (including Fiat sales).
  • Operating margins improved sharply to 11.2% during the quarter. This was on account of lower raw material costs (as a percent of sales).
  • Interest costs increase by 125% YoY during the quarter due to increased debt taken by the company to support its new product development and for meeting its working capital requirements.
  • Excluding the impact of extraordinary items (forex losses) from both the periods under consideration, net profits have risen by 7% YoY.
  • The company has done a capex of Rs 5.8 bn for first quarter. It has plans to invest Rs 25 bn for the full year in capex.
  • Nano deliveries commenced in July. The company also opens its first Jaguar Land Rover showroom in India.


Financial picture
Rs m) 1QFY09 1QFY10 Change
Units sold 133,079 127,340 -4.3%
Net sales 69,284 64,046 -7.6%
Expenditure 64,444 56,878 -11.7%
Operating profit (EBDITA) 4,840 7,168 48.1%
EBDITA margin (%) 7.0% 11.2%  
Other income 3,158 3,194 1.1%
Interest (net) 1,123 2,535 125.6%
Depreciation 1,808 2,291 26.7%
Profit before tax 5,066 5,536 9.3%
Extraordinary item (1,616) (55)  
Tax 190 343 80.6%
Profit after tax/(loss) 3,261 5,137 57.6%
Net profit margin (%) 4.7% 8.0%  
No. of shares (m) 385.5 514.1  
Diluted earnings per share (Rs)   23.1  
Price to earnings ratio (x)   17.0  
*12 months trailing earning

What has driven performance in 1QFY10?
  • Tata Motors registered a 7.6% YoY decline in net sales during Q1FY10 impacted mainly by a 4.3% YoY decline in volume sales. The total commercial vehicle sales were down 3.4 % YoY, while passenger vehicle sales witnessed a fall of 5.7% YoY (includes sales of Fiat). While the domestic volumes saw a drop of 1.4% YoY, the exports declined by more than 40% YoY during the quarter on the back of decline in key markets due to the ongoing global economic slowdown and contraction in liquidity.

    Sales break-up…
    Units) 1QFY09 1QFY10 (change)*
    Domestic      
    M&HCV 35,757 26,633 -25.5%
    LCV 35,652 45,583 27.9%
    Total CV sales 71,409 72,216 1.1%
    Utility Vehicles 12,365 8,065 -34.8%
    Cars 40,085 41,839 4.4%
    Total PV sales 52,450 49,904 -4.9%
    Total domestic sales 123,859 122,120 -1.4%
           
    Exports      
    Commercial vehicles 7,747 4,267 -44.9%
    Passenger vehicles 1,473 953 -35.3%
    Total exports 9,220 5,220 -43.4%
           
    Total      
    Total CV sales 79,156 76,483 -3.4%
    Total PV sales 53,923 50,857 -5.7%
    Grand total 133,079 127,340 -4.3%

  • On the domestic front, while the segments where the company is present have seen a 9% YoY decline in volumes, Tata Motors performance is better with around 1.4% YoY drop. The MHCV segment declined by 35.5%, while Tata Motors volumes declined by 25.6% YoY. LCV segment clocked a robust 20.5% YoY growth, while Tata Motors’s volumes increased by 28% YoY. The bus segment grew by 11% YoY led by of good orders from STUs (State Transport Undertakings) as compared to industry de growth of 16.2% YoY. The company has gained market-share across all commercial vehicle segments as indicated below. Also, the MHCV truck decline has narrowed to around 40% in Q1FY10 compared with 65% and 59% in the preceding two quarters.

    Market share: Gain in CV, loss in PV
    Segment 1QFY09 1QFY10
    M/HCVs 59.3% 68.5%
    LCVs 62.8% 66.7%
    Total CVs 61.0% 67.4%
    Small Car 10.8% 11.1%
    Entry-level Mid-size Car 33.6% 25.2%
    UV 24.1% 18.7%
    Total PV 12.9% 11.3%

  • The passenger car sales reported a volume decline of 5% YoY mainly led by higher competition. The passenger vehicle industry registered a growth of 3% YoY, mainly driven by new products supported by easing access to finance and low interest rates. While the car major saw a drop in the market share on a YoY basis, the market share has been increasing sequentially from April to June 2009. Launch of new products would aid the growth going forward. The sales are in line with our estimates

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 49,891 42,781 -14.3%
    % sales 72.0% 66.8%  
    Staff cost 4,009 3,984 -0.6%
    % sales 5.8% 6.2%  
    Other expenditure 10,543 10,114 -4.1%
    % sales 15.2% 15.8%  

  • The company’s operating margins improved by 4.2% YoY, driven primarily by a steep fall in raw material costs, which now account for 67% of sales from just over 72% of sales during 1QFY09. The operating margins, at 11.4%, were the highest in the last 5 quarters. Further, strong focus on cost efficiencies coupled with inventory reduction, improvement in sales realization and improved product mix aided the expansion. The total expenses reduced by 12% YoY. Also, increased production activity at the company’s tax-free unit at Uttarakhand helped reduce excise duty payout, which saw a fall of 42% YoY. The operating margins have improved sharply even on a sequential basis, led by higher sales of high-margin medium and heavy commercial vehicles (M&HCVs). The management has indicated of maintaining the current margins level a challenging task. While it would continue with its cost reduction incentives and maintain raw material cost, any strong input price hike would affect its performance.

  • Excluding the exceptional notional forex valuation loss during both the quarters, the net profits have increased by 7% YoY. Increased debt taken by the company during the previous year in the wake of the global environment to support its product programmes and investments and working capital requirements caused interest costs to increase by 126% YoY. This restricted the net profit growth inspite of higher operating margins. The company has done better than our estimates.

  • Tata Motors’ net debt stood at Rs 169 bn as on 30th June’09. The increase in debt was mainly on account of issue of Rs.42 bn of low coupon premium redemption bonds in May’09 as part of refinancing of the acquisition bridge loan taken by the company and increased collection of fixed deposits. The debt to equity ratio stood at 1.56:1. The management has indicated of reducing the debt levels through divestment of investments, internal accruals and capital raising at appropriate time.

  • The total book size on the vehicle financing side stood at Rs 77 bn. The disbursals during the quarter were down 38% YoY mainly because of higher competition. Its market share declined to 28% as compared to 34% last year.

What to expect?
At the current price of Rs 393, the stock trades at a multiple of 11.3x our estimated FY12 cash flow per share. While the year on year decline in volumes has hampered its topline performance, it is witnessing better numbers on a sequential basis. Further, the cost reduction plans have also benefited the company. With continued focus on new launches, the management is positive on the growth front. Hence, in view of all these factors, the stock does like a decent medium term bet despite the current run up in prices.

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