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Tata Motors: The pressure’s showing - Views on News from Equitymaster
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Tata Motors: The pressure’s showing
Jul 31, 2007

Performance Summary
  • Led by 1% YoY growth in volumes, standalone topline registers a growth of 5% YoY.

  • Forex gains leads to EBITDA margin expansion of 130 basis points. Excluding the same, margins contract 210 basis points and operating profits fall 16% YoY.

  • Modest rise in interest expense as well as depreciation charges lead to a 22% YoY growth in bottomline and 110 basis point expansion in net margins.

  • Consolidated revenues grow 13% YoY and net profits up 30% YoY.

(Rs m) 1QFY07 1QFY08 Change
No of units sold 126,154 127,361 1.0%
Net sales 57,834 60,568 4.7%
Expenditure 51,571 53,240 3.2%
Operating profit (EBDITA) 6,263 7,329 17.0%
EBDITA margin (%) 10.8% 12.1%  
Other income 859 863 0.5%
Interest (net) (726) (816) 12.4%
Depreciation 1,411 1,475 4.6%
Profit before tax 4,986 5,902 18.4%
Extraordinary income/(expense) (4) 20  
Tax 1,164 1,254 7.7%
Profit after tax/(loss) 3,819 4,668 22.2%
Net profit margin (%) 6.6% 7.7%  
No. of shares (m) 383.0 385.4  
Diluted earnings per share (Rs)* 39.6 48.4  
Price to earnings ratio (x)**   13.5  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Tata Motors (Telco) is India's largest commercial vehicle (CVs) manufacturer, with a domestic market share of an imposing 65% in FY07 and second largest producer of passenger vehicles (16% of domestic demand in FY07). Its plants are located at Pune, Jamshedpur and Lucknow. From a net loss of Rs 5 bn in FY01 to a profit of Rs 19 bn in FY07, the company has come a long way. It acquired the CV division of South Korean auto major Daewoo in FY04 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. Similarly, company has also acquired a 21% stake in Hispano, a Spanish company, with an option to acquire the rest of the 79%. The company has earmarked a huge capex to the tune of Rs 120 bn, to be fully invested till FY10-FY11. On the anvil are a new Rs 1 lakh car, a global truck and a new UV platform.

What has driven performance in 1QFY08?
Cars and M&HCVs disappoint: Volumes story during the quarter was not very heartening as Tata Motors could manage just 1% YoY growth, both domestic and exports sales combined. This is because two of its main segments viz., M&HCVs and cars failed to fly off the shelves quickly. While the 11% YoY drop in the former was mostly industry inflicted, a modest 1% growth in latter, especially when industry grew by an impressive 13% YoY, has come because of few chinks that have surfaced in its own armor. With rivals like Maruti launching diesel cars, Tata Motors has been unable to maintain its strong grip in this segment, leading to loss of market share.

The company’s other segments though helped nullify to some extent the poor performance of its two biggest segments. The continued success of ‘Ace’ helped it grow its LCV volumes by nearly 10% YoY, while sales of UVs were also higher by 19% YoY. In the latter, the company even managed to outperform the industry, which grew 11% YoY. In LCVs though, industry growth came in higher at 15% YoY. As far as exports are concerned, a strong 42% YoY growth in M&HCV segment helped total exports grow by 6% YoY. Growth in topline at 5% YoY came in higher than the total volume growth due mainly to price hikes and better product mix.

Volumes break up…
(Units) 1QFY06 1QFY07 1QFY08 (change)*
Domestic
M&HCV 22,999 36,607 32,655 -10.8%
LCV 14,237 26,535 29,044 9.5%
Utility Vehicles 7,343 8,417 10,040 19.3%
Cars 33,847 41,489 41,800 0.7%
Exports
M&HCV 1,389 2,273 3,232 42.2%
LCV 4,325 5,462 6,360 16.4%
Utility Vehicles 67 506 595 17.6%
Cars 3,292 4,865 3,635 -25.3%
Total
M&HCV 24,388 38,880 35,887 -7.7%
LCV 18,562 31,997 35,404 10.6%
Utility Vehicles 7,410 8,923 10,635 19.2%
Cars 37,139 46,354 45,435 -2.0%
Grand total 87,499 126,154 127,361 1.0%
(*1QFY08 upon 1QFY07)

Forex gains save margins: Company’s operating margins have expanded by 130 basis points, attributed solely to a sizeable drop in other expenses as a percentage of sales. However, this is not the true picture. Included in other expenses is a huge Rs 2 bn gain that the company has recorded on its dollar denominated loans. If one excludes the same, then the operating margins crumble under the rising burden of higher raw material costs and staff expenses, resulting into an operating margin contraction of 210 basis points.

cost break up...
(Rs m) 1QFY07 1QFY08 Change
Raw materials 38,797 42,206 8.8%
% sales 67.1% 69.7%  
Staff cost 3,024 3,519 16.3%
% sales 5.2% 5.8%  
Other expenses 9,749 7,515 -22.9%
% sales 16.9% 12.4%  

Bottomline growth at 22% YoY, which is higher than the 17% YoY growth in operating profit is a consequence of relatively lower growth in interest expenses and depreciation charges. The lower growth here especially on the depreciation front is surprising because the company has embarked on a huge capex program whereby it will be spending close to Rs 120 bn between FY07 and FY11. Therefore, in future quarters, we might see a significant increase here.

Over the last few quarters: As can be seen from the table below, both topline growth as well as margins (net of forex gains) for the latest quarter has come in at a significantly lower rate than the previous four quarters. Rising competition and hardening of interest rates are indeed having an effect on the profitability of the company.

over the last few quarters…
  1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
Net sales (YoY growth %) 49.1% 37.4% 37.1% 20.1% 4.7%
OPM 10.8% 11.3% 13.7% 11.3% 12.1%
NPM 6.6% 6.7% 7.4% 7.0% 7.7%

What to expect?
At the current price of Rs 700, the stock is trading at a multiple of 9 times our estimated FY10 cash flow. Although the company’s volumes have disappointed during the quarter, we believe it is not that significant so as to materially affect our projections from a three-year perspective. Hence, we stick with our current estimates, which gives a 10% CAGR based on the current price per share of the company.

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