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Tata Motors: China hampers JLR - Views on News from Equitymaster

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Tata Motors: China hampers JLR
Aug 24, 2015

Tata Motors has announced its results for the first quarter ended June 2015 recently. Revenues fall by 6% YoY, while net profits fall by 49% YoY on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Net sales fall by 6% YoY on a consolidated basis led by the growth in the Indian operations.
  • Operating margins contract by 2.3% to 14.9% YoY during the quarter on account of the substantial rise in most cost heads (as percentage of sales).
  • Net profits fall by 49% YoY on account of the poor performance at the operating level, higher depreciation charges and interest costs.

Consolidated financial snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 646,828 610,195 -5.7%
Expenditure 535,366 519,108 -3.0%
Operating profit (EBDITA) 111,463 91,088 -18.3%
EBDITA margin (%) 17.2% 14.9%  
Other income 2,132 3,072 44.1%
Finance costs 9,455 11,174 18.2%
Depreciation 29,796 38,232 28.3%
Exceptional items 940 (1,167)  
Profit before tax 75,285 43,587 -42.1%
Tax 21,151 15,703 -25.8%
Profit after tax/(loss) 54,134 27,885 -48.5%
Share of profits of associates 48 50  
Minority interest (200) (245)  
Net profit after taxes 53,982 27,689 -48.7%
Net profit margin (%) 8.3% 4.5%  
No. of shares (m)   3,395.9  
Diluted earnings per share (Rs)*   34.6  
Price to earnings ratio (x)*   9.6  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 1QFY16?
  • Tata Motors reported a 6% YoY decline in revenues for the quarter. The growth was largely led by the Indian operations (up 21% YoY) as revenues from JLR declined by 7% YoY (in GBP terms).

  • For the standalone entity (Indian operations), the sales volumes (including exports) of commercial vehicles remained flat during the quarter. However, this was largely on account of the dip in volumes of light commercial vehicles (LCVs). Constraints on financing and lack of last mile loads impacted this segment. Having said that, the performance of the medium & heavy CV (MHCV) segment was very strong as volumes were up 21% YoY during the quarter. The strong performance of this segment was attributed to fleet replacement demand mainly in the high tonnage segments. At the end of the quarter, Tata Motors' market share in MHCVs stood at 52.6%. The passenger vehicles segment saw growth of 27% YoY for the quarter. In the passenger vehicles segment, Tata Motors' market share stood at 5.6%.

  • As far as JLR is concerned, for the quarter, the retail volumes of Land Rover were up 1% YoY led by Range Rover, Range Rover Sport and Discovery. Those of Jaguar were down by 7% YoY. In this, XF and XJ saw declining volumes in advance of the new XF and refreshed XJ on sale from 2QFY16. In terms of geographies (in wholesale volume terms), economic challenges in China impacted the company and hence the share of China declined to 14.4% as against 29.5% in 1QFY15.

  • The overall operating margins contracted by 2.3% to 14.9% during the quarter largely on account of the rise in staff costs, product development expenses and other expenditure (as percentage of sales). Raw material costs remained under control. Thus, operating profits fell by 18% YoY.

  • Net profits (excluding extraordinary items) fell by 49% YoY during the quarter on account of poor performance at the operating level, higher depreciation charges and interest costs.
What to expect?
At the current price of Rs 333, the stock trades at a multiple of 9.6 times its trailing twelve month earnings on a consolidated basis (excluding extraordinary items). Tata Motors expects the volumes of MHCVs to be more comprehensive and sustainable in FY16. Meanwhile, JNNURM Phase 2 orders are expected to boost bus volumes. In the passenger vehicles space, the company has a slew of launches lined up, which is a positive sign. According to the company, it has outlined a product plan till 2020 as per which 2 new vehicle launches will be slated every year.

As far as JLR is concerned, the company has lined up new product launches over the next 18 months, which include the Jaguar XF, F-Pace among others. The company will be investing in new products and technologies as well as capacity expansion. Because of the uncertainty in China, the company will be adjusting its production and sales targets to reflect the slowing market as well as JLR model transition issues. The rationale behind this to keep supply and demand in balance.

We value Tata Motors using the sum of the parts (SOTP) method. Since, it has become quite difficult to take a call on the profitability of the standalone operations of Tata Motors, we have valued this business using the price to sales multiple. Consequently, we have used a price to sales multiple of 1x to value standalone Tata Motors. To this, we have added the value of JLR (valued using an EV/EBIT multiple of 8x) which works out to Rs 198 per share (after factoring in the rights issue). Thus, the total value for the company for FY18 stands at Rs 349 per share. Thus, our view is that investors not buy the stock of Tata Motors at the current price levels.

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