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Tata Motors: Just an aberration…
Jul 29, 2005

Introduction to results
Tata Motors, the largest commercial vehicles manufacturer in India, announced its 1QFY06 results. The results for the quarter are not strictly comparable with that of 1QFY05 due to the merger of Tata Finance Limited, Telco Dadajee Dhackjee Ltd. and Suryodaya Capital and Finance (Bombay) Ltd with Tata Motors effective 1st April 2005. However, considering that the impact of these companies is not significant, we have compared the same. While the topline grew by a modest 9% YoY, efficient cost management enabled the company to report a 19% YoY increase in operating profits. Had it not been for a 41% YoY increase in other income, the bottomline of the company would have been much lower owing to a substantial jump in interest outgo and depreciation.

(Rs m) 1QFY05 1QFY06 Change
Net sales 35,741 38,781 8.5%
Expenditure 31,713 33,977 7.1%
Operating profit (EBDITA) 4,028 4,804 19.3%
Operating profit margin (%) 11.3% 12.4%  
Other income 412 583 41.3%
Interest 416 510 22.6%
Depreciation 983 1,267 28.9%
Profit before tax 3,042 3,610 18.7%
Extraordinary items - (10) -
Tax 797 873 9.6%
Profit after tax/(loss) 2,244 2,727 21.5%
Net profit margin (%) 6.3% 7.0%  
No. of shares (m) 362 362  
Diluted earnings per share (Rs)* 24.8 30.1  
P/E (x)   15.9  
(* annualised)      

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 65% (FY04 - 59%) and second largest producer of passenger vehicles. Its plants are located at Pune, Jamshedpur and Lucknow. It had entered into an agreement with Rover, UK for supply of 100,000 plus passenger cars over a five-year period, which however, has been terminated. From a net loss of Rs 5 bn in FY01 to a profit of Rs 12 bn in FY05, 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 the performance in 1QFY06?
Volumes – a mixed bag:  As can be seen from the table below, the performance of the company has been a mixed bag. In commercial vehicles, domestic M&HCV (medium and heavy commercial vehicles) volumes have acted as dampener primarily due to two reasons. First being the ‘government’s indecisiveness’ on emission norms, which resulted in preponement of purchases by freight operators in the last quarter of FY05. This was expected to affect the performance of the commercial vehicle manufacturers in 1QFY06. Secondly, the company was facing supply related constraints, which affected its production leading to lower availability of CVs for sale. Just to put things in perspective, during April 2005 and May 2005, Tata Motors recorded de-growth of 34% and 28% YoY respectively in sales volume of M&HCV.

Segmental break up…
  Domestic Exports Total
Segment 1QFY05 1QFY06 % change 1QFY05 1QFY06 % change 1QFY05 1QFY06 % change
M & HCV 27,381 21,993 -19.7% 1,087 1,389 27.8% 28,468 23,382 -17.9%
LCV 12,505 16,238 29.9% 2,179 4,056 86.1% 14,684 20,294 38.2%
Total CVs 39,886 38,231 -4.1% 3,266 5,445 66.7% 43,152 43,676 1.2%
U.Vs 6,674 7,344 10.0% 186 87 -53.2% 6,860 7,431 8.3%
CARS 34,111 33,848 -0.8% 795 1,586 99.5% 34,906 35,434 1.5%
Total 80,671 79,423 -1.5% 4,247 7,118 67.6% 84,918 86,541 1.9%

Similarly, the domestic car performance was affected during the quarter under consideration. After logging in a growth of 7% YoY in the month of April 2005, the growth plateaued in the month of May 2005 (up 0.2%) and was followed by an 8% YoY decline in demand in the month of June 2005 This declining trend was seemingly a factor of the much-awaited launch of Maruti’s ‘Suzuki’, which led to customers postponing their purchases.

Had it not been an all round performance on the export front, the volume performance for the company would have registered de-growth on the overall volumes front. It should be noted that since the last two years, the company has been trying to increase its geographical reach in order to reduce the cyclical risk inherent to one particular country. This strategy of the company has started paying dividends as can be seen from the performance during the current quarter.

Going forward we feel that the exponential growth in the CV industry is not sustainable. Having said that we believe that with structural changes taking place in the economy, the demand for commercial vehicles over the next 2 to 3 years will sustain in the range of 6% to 8% with a bias towards high tonnage vehicles. As far as the passenger car segment is concerned, we feel that with benign interest rates and rising consumer income, the growth will be in the range of 11% to 13% per annum.

Cost break-up...
(Rs m) 1QFY05 1QFY06 Change
Raw materials 23,328 28,817 23.5%
% sales 65.3% 74.3%  
Staff cost 2,361 2,759 16.9%
% sales 6.6% 7.1%  
Other expenses 6,023 6,022 0.0%
% sales 16.9% 15.5%  
Raw material blues continues:  Despite a drastic jump in the raw material costs (see table below), the company has done well to improve its operating margins by 110 basis points in the current quarter. This has been on account of continuous thrust of the company on value engineering, cost management and optimum utilisation of resources.

Other income saves the day:  Had it not been for a 41% rise in other income, the net profits of the company would have been much lower considering the 23% YoY and 29% YoY rise in interest and depreciation expenses. Better management of working capital and improved performance has enabled the company to generate strong cash flows. Just to put things in perspective, the company generated more than Rs 12 bn from operations during FY05 as compared to Rs 3 bn in FY04. Apart from this, lower tax burden also enabled the company to improve on its net profit margins.

What to expect?
At Rs 479, the stock is trading at a price to earnings multiple of 15.9 times its 1QFY06 annualised earnings. As stated above, we believe that due to structural changes taking place in the country, the demand for commercial vehicles would remain strong. Further, Tata motors being the industry leader, we feel that it is best placed to capitalise on the India growth story. The mixed performance of the company during the quarter was thus an aberration, especially in the M&HCV segment.

As far as the passenger car segment is concerned, the demand will be steady with a bias towards ‘Segment B’ cars (price range Rs 0.3 to 0.5 m). Tata Motors is well placed in this segment with its flagship model ‘Indica’. Apart from the domestic demand, the company is also putting significant emphasis on increasing its geographical spread to insulate itself. This, we believe, is an important factor in favour of the company. However, we feel that with the good response to Maruti’s ‘Swift’, there could be some pressure on the volume growth of the company in the next few quarters.

Recently, we had recommended a 'Buy' on the stock in May 2005 with a price target of Rs 690 in two years. We maintain our view on the stock despite the disappointing performance of its CV division in the first two months of FY06.

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