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Tata Motors: Driven by JLR again - Views on News from Equitymaster

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Tata Motors: Driven by JLR again
Aug 8, 2013

Tata Motors announced its results for the quarter ended June 2013 recently. The company reported an 8% YoY increase in revenues, while net profits fell by 23% YoY on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Net sales grow by 8% YoY on a consolidated basis during the quarter largely on account of strong growth in revenues from Jaguar Land Rover (JLR).
  • Operating margins remain stable at 13.3% YoY during the quarter.
  • Net profits, however, fall by 23% YoY on account of a substantial rise in depreciation charges as well as higher tax expenses.

Consolidated financial performance
(Rs m) 1QFY13 1QFY14 Change
Net sales 433,236 467,847 8.0%
Expenditure 375,687 405,655 8.0%
Operating profit (EBDITA) 57,549 62,192 8.1%
EBDITA margin (%) 13.3% 13.3%  
Other income 2,386 1,823 -23.6%
Finance costs 8,044 9,482 17.9%
Depreciation 15,659 23,477 49.9%
Exceptional items (4,405) (1,786)  
Profit before tax 31,827 29,270 -8.0%
Tax 8,688 11,642 34.0%
Profit after tax/(loss) 23,139 17,628 -23.8%
Share of profits of associates (414)  (169)  
Minority interest (276)  (198)  
Net profit after taxes 22,449 17,261 -23.1%
Net profit margin (%) 5.2% 3.7%  
No. of shares (m)   3,189.9  
Diluted earnings per share (Rs)*    30.5  
Price to earnings ratio (x)*    9.2  
(* On a trailing 12-month basis, adjusted for extraordinary items)
What has driven performance in 1QFY14?
  • Tata Motors reported a revenue growth of 8% YoY for the quarter and this was primarily on account of better sales of the Jaguar Land Rover business as operations in India continued to face pressure. As far as the Indian operations are concerned, as per the company, sluggish economic activity and weak macro environment put pressure on volumes in the M&HCV segment (which forms a huge chunk of the sales volumes). Revenues from the passenger vehicles business was also adversely impacted on account of the slowdown and intense competition.

    Commercial vehicles volume sales fell by 7% YoY during the quarter. Volumes of both MHCVs and LCVs witnessed a decline of 9.6% YoY and 5.5% respectively. Tata Motors' passenger vehicles sales in the domestic market (including Fiat and Jaguar Land Rover vehicles) plunged 42% YoY during the quarter. Other than the premium/ luxury segment (which includes Jaguar vehicles sold in India), all other segments in the PV space saw a drop in volumes. The volume decline was quite substantial at 82% YoY for the micro segment which consists of the Nano.

    As for JLR's global sales, volumes grew by 8.6% YoY to 90,620 units. This was largely on account of a surge in Jaguar volumes as wholesales were up 58% YoY. Land Rover wholesales in contrast grew by a mere 1% YoY during the quarter. Geography wise, Jaguar did well in all the regions with the strongest growth coming in North America, China and the UK. As far as Land Rover is concerned, growth was largely led by strong volumes in the Asia Pacific and UK region, while most of the other regions witnessed a fall in volumes.

  • Tata Motors' consolidated operating profits grew in tandem with sales at 8% YoY as operating margins remained stable at 13.3% during the quarter. Decline in raw material costs was offset by higher staff costs and other expenditure (all as a percentage of sales). The latter especially increased on account of higher marketing spends in a highly competitive environment. Product development expenses remained stable at 1.1% of sales.

    Cost break up
    (Rs m) 4QFY12 4QFY13 Change
    Raw materials/ purchases 277,494 288,855 4.1%
    % sales 64.1% 61.7%  
    Staff cost 37,897 44,612 17.7%
    % sales 8.7% 9.5%  
    Product development expenses 4,797 5,341 11.3%
    % sales 1.1% 1.1%  
    Other expenditure* 55,499 66,846 20.4%
    % sales 12.8% 14.3%  
    Total expenditure 375,687 405,655 8.0%

  • Tata Motors' net profits fell by 23% YoY during the quarter on account of higher tax expenses and substantial increase in depreciation charges.

What to expect?
At the current price of Rs 280, the stock trades at a multiple of 9.2 times its trailing twelve month earnings on a consolidated basis. Going forward, MHCVs are expected to witness pressure at least in the first half of FY14 as a significant economic recovery is yet to happen. On the passenger vehicles front, headwinds will continue to exist in the form of intense competition and increasing costs. The latter will especially be on higher marketing spends as the company aims to keep the demand for its products up against a highly competitive backdrop. Tata Motors also intends to improve distribution networks, customer engagement levels as well as refresh products. As far as JLR is concerned, the company has outlined capex of GBP 2.75 bn for FY14. Focus of this will be on new products and technologies, meeting regulatory environmental standards and building manufacturing capacity in the UK. In light of the current valuations, we have a 'Sell' view on the stock.

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