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Tata Motors: Margins take toll

Jul 30, 2008

Performance summary
  • Standalone topline registers a growth of 14% YoY during 1QFY09, significantly higher than the 3% YoY growth in volumes.
  • Operating margins tank 460 basis points (4.6%) and profits fall 29% YoY on the back of steep increase in costs.
  • Despite huge jump in other income bottomline falls 30% YoY during the quarter. Excluding the exceptional items it grows by a decent 13% YoY.

(Rs m) 1QFY08 1QFY09 Change
No of units sold 127,361 131,733 3.4%
Net sales 60,568 69,284 14.4%
Expenditure 53,240 64,059 20.3%
Operating profit (EBDITA) 7,329 5,225 -28.7%
EBDITA margin (%) 12.1% 7.5%  
Other income 863 3,156 265.6%
Interest (net) 816 1,123 37.7%
Depreciation 1,475 1,808 22.6%
Profit before tax 5,902 5,450 -7.7%
Extraordinary income/(expense) 20 (1,999)  
Tax 1,254 190 -84.9%
Profit after tax/(loss) 4,668 3,261 -30.1%
Net profit margin (%) 7.7% 4.7%  
No. of shares (m) 385.4 385.7  
Diluted earnings per share (Rs)*   47.2  
Price to earnings ratio (x)*   9.0  
(* on trailing twelve months earnings)

What has driven performance in 1QFY09?
  • At 14% YoY, the company’s topline growth in value terms has remained buoyant. Overall volumes though have recorded a moderate growth of 3% YoY. The huge difference between the two could be attributed to superior growth in sales of high value products and pricing action in certain segments. If one were to look at the different segments that the company caters to, except cars all the other segments have witnessed YoY growth in domestic sales with UVs and LCVs recording the maximum growth of 23% each on the back of new launches. In cars, while sales of its B-segment offering ‘Indica’ has come under pressure, the company was able to limit the damage on account of the robust performance of its latest C-segment offering ‘Indigo CS’. The company’s exports have also fared poorly, falling by 34% on a YoY basis in the period under consideration. The company is hopeful of maintaining its growth in all the segments on the back of new products that will roll out over the next few quarters.

    Sales break up
    (Units) 1QFY07 1QFY08 1QFY09 (change)*
    M&HCV 36,607 32,655 35,835 9.7%
    LCV 26,535 29,044 35,645 22.7%
    Utility Vehicles 8,417 10,040 12,366 23.2%
    Cars 41,489 41,800 38,728 -7.3%
    M&HCV 2,273 3,232 2,534 -21.6%
    LCV 5,462 6,360 5,152 -19.0%
    Utility Vehicles 506 595 197 -66.9%
    Cars 4,865 3,635 1,276 -64.9%
    M&HCV 38,880 35,887 38,369 6.9%
    LCV 31,997 35,404 40,797 15.2%
    Utility Vehicles 8,923 10,635 12,563 18.1%
    Cars 46,354 45,435 40,004 -12.0%
    Grand total 126,154 127,361 131,733 3.4%

  • On the margins front, inflationary pressures seems to have finally caught up with the company as operating margins have fallen by a significant 460 basis points. Raw material costs as a percentage of sales have come in higher by 230 basis points and have been the key culprit behind the margin fall. Other expenses have also played spoilsport, rising by as much as 35% on a YoY basis.

    Cost break up
    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 42,206 49,889 18.2%
    % sales 69.7% 72.0%  
    Staff cost 3,519 4,009 13.9%
    % sales 5.8% 5.8%  
    Other expenses 7,515 10,160 35.2%
    % sales 12.4% 14.7%  

  • Despite a 29% fall in operating profits, bottomline growth stood at 13% YoY if we exclude the exceptional items. This was mainly due to a huge 266% jump in other income. During the quarter, the company partially divested its stake in Tata AutoComp Systems Ltd. an associate company, from 50% to 26%. The resultant profit of the divestment of Rs 1.2 bn is included in the other income, thus giving it a boost. If one were to include the exceptional losses of Rs 2 bn (notional) arising out the company’s foreign currency exposure, then the bottomline has actually fallen by a significant 30% YoY. The fact that interest expenses and depreciation expenses have increased sharply has also not helped matters.

What to expect?
At the current price of Rs 416, the stock is trading at 6 times its expected FY11 standalone cash flow. While the topline growth has been enthusing, steep fall in operating margins is concerning and if the trend persists, we will have to revise our estimates downwards, posing some threat to near term valuations. Risk reward ratio for the long-term though looks favorable as the company is well placed to take advantage of the industry growth story on the back of a strong pipeline of products and a strong balance sheet.

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