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Tata Motors: Conference call excerpts - Views on News from Equitymaster
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Tata Motors: Conference call excerpts
Aug 11, 2005

Post its 1QFY06 results, Tata Motors held a conference call to give an insight into the performance of the company in the quarter and the future outlook of the Indian auto industry. The excerpts of the same are stated below. Performance in first quarter:  Tata Motors witnessed a near 6% YoY decline in volumes in the M&HCV segment at the time when its peers have performed reasonably well. This was mainly due to delay in implementation of Bharat-II norms in the northern regions where Tata Motors has an 80% market share. The company attributed the launch of ‘ACE’ to have improved the demand in the LCV segment. ‘ACE’ is a sub-one tonne LCV, which has been launched in four southern states and Maharashtra. The all round performance on the exports front has been due to increased geographical reach of the company. Presently, Tata Motors’ products are in demand in South East Asian, African and Gulf countries. Further, the company has also developed presence in South Africa, Turkey, Russia and Eastern Europe.

Industry Outlook:  Though the management is bullish about the long-term growth prospects of the Indian economy and hence the commercial vehicles segment, for FY06, the company expects a flat to marginal growth in the domestic commercial vehicle industry. According to the management, the recent rise in fuel prices have been on a higher side with no commensurate increase in the freight index, thereby affecting the freight operators’ earnings. Hence, freight operators have started to adopt a wait and watch policy and have delayed the purchase of new vehicles. Apart from this, the recent flood like situation in Gujarat, Maharashtra and some other parts of the country can also affect the agricultural output to some extent. This can impact the demand in the next two to three quarters. However, on a long-term basis, the management expects CV demand to grow by 10% to 12% per annum on the back of structural changes taking place in the country. We, however, expect CV demand to grow at a CAGR of 6% to 8% in the next three years.

As far as the bus segment is concerned, the management believes that there is a significant room for growth which can be as high as that witnessed in the truck segment in the past two years.

Cost reduction plans:  Tata Motors aims to save around Rs 10 bn in the next three years, through improving efficiency and global sourcing. In a step in this direction, the company has started sourcing its components requirement from China. Further, the company is considering Thailand and East European markets for sourcing purposes. The main objective of cost reduction plans is to ward of competition from domestic players and imports. As per the management, based on current prices, imported vehicles are approximately 30% cheaper than what is asked for by Tata Motors for its vehicles.

Steel price outlook:  As per the management, steel prices have already started softening. However, the benefit of this will be restricted for the company due to its policy of entering into long term contracts to cater to around 60% of its requirements.

Tata Finance Limited (TFL):  With effect from 1st April 2005, TFL has been merged with the company and hence the results of the first quarters are not strictly comparable. The management has clarified that TFL accounted for around 3% of the topline in 1QFY06. Further, TFL also enabled the company to improve its margins by 0.5% in the current quarter.

Overall business strategy and new launches:  As stated earlier, the management if of the belief that competition is likely to increase in future. This will put pressure on the pricing. In order to cater to competition, Tata Motors is giving significant thrust on improving efficiency and increasing its global presence in order to de-risk its business model. In order to move in this direction, the company has adopted the strategy for manufacturing vehicles that are globally competitive which may be modified to suit the Indian roads as compared to previous strategy of catering to the domestic and international markets separately. It should be noted that international business accounted for around 17% of the total revenue on a consolidated basis in FY05. The company has set a target of atleast 35% YoY growth in the exports in FY06.

What to expect?

At Rs 493, Tata Motors’ stock is trading at a price to earnings multiple of 10.6 times our estimated FY06 earnings. We believe that with structural changes taking place in the Indian industry, the demand for commercial vehicles will be in the range of 6% to 8% per annum in next two to three years with a bias towards higher tonnage vehicles. Traditionally, the company has been outperforming the industry growth (1QFY06 was an aberration). We expect the company to atleast maintain its market share if not improve on it.

Also, with the merger of TFL, we feel that the vehicle-financing business will get a fillip. Apart from this, the present diversified portfolio (both in terms of products and geographical reach) of the company gives an additional cushion against any downturn in the industry, which is a major positive. We had recommended a ‘Buy’ on the stock in May 2005 (price a target of Rs 690) with a two-year horizon. We maintain our view.

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