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Tata Motors: Research meet extracts
Sep 1, 2005

Post the below par performance of the company during the first four months of the current fiscal, we had a meeting with the management so as to get a better insight into the performance of the company and its long term plans. The extracts of this meeting are given below. Below par performance during April to July 2005: The demand for medium and heavy commercial vehicle (M&HCV) of Tata Motors (TML) saw a decline of 18% YoY, which was in line with the overall industry demand. As per the management, the primary reason for the same has been the confusion related to implementation of emission norms and VAT in the northern states, where it has almost 80% market share. The management opined that this trend was an aberration and the demand will start gathering steam again as these issues settle down. We expect the industry to grow at 6% CAGR over the next three years. However, considering the dismal performance during the first four months of FY06, the volumes growth can be on the lower side for the current fiscal with the potential of catching up in subsequent years provided the industrial activity sustains the momentum.

Replacement demand: As per the management, the replacement cycle is generally of 4 to 5 years with some amount of replacement already having taken place on account of advanced purchases in 4QFY05. However, as the emission norms related issues settle down and the laws pertaining to the restriction on the usage of vehicles based on age are implemented, the replacement demand would again become visible.

Freight index: In the last four months, the fuel price index has increased by 27% as against a mere 6% increase in the freight index. This puts a question mark on the expected demand of commercial vehicles going forward because freight rates have not gone up commensurately with that of the fuel prices thereby affecting the profitability of freight operators. However, the management has opined that though the freight index is relevant, in the current scenario the freight operators are earning sufficient margins and hence there is no need for them to delay new purchases. However, we believe that there has been some impact of the widening gap between the two indices, which resulted in 18% YoY decline in the demand as against our expectation of 3% to 4% fall in the first quarter. Having said that, with the industrial activity having maintained the momentum so far, we do not foresee any constraints on freight rates and expect these to improve thereby reducing the gap.

Bus segment: The management opines that the demand for buses can be as high as that witnessed in the trucks segment in the last three years. The primary reasons for the same being an under penetrated market, increasing private participation and improving inter-city connectivity. Further, the company is well poised to capitalize on this growth opportunity as it enjoys a 50% market share in the bus segment.

Threat of competition: The company does not foresee any significant threat from new entrants like Mercedes, MAN Industries and Volvo among others on account of capital costs, maintenance costs and dealer network. According to the management, it will be difficult for a new player to set up base and sell CVs at current price levels. We feel that with import tariffs expected to fall further, at current price levels, imported vehicles will be around 10% to 15% cheaper. However, it should be noted that Indian manufacturers have an advantage in terms of quality of the vehicles as compared to the cheaper imports especially from certain South East Asian players. However, in the passenger car business, one of the key reasons to worry is increasing competition from international players especially in the compact car segment.

Passenger cars: The management expects the demand for passenger cars to grow at 10% per annum for the next three years. Though we feel that the growth target for the industry is achievable, we have some apprehensions regarding the company’s performance in the absence of any new launches in the near future. As per the management, the company is working on a new platform, which will be operational in the next two to three years (apart from the Rs 100,000 car). We believe that absence of new models can affect the company’s market share in the B segment where it has a significant presence.

International business: With increasing thrust on the international business, we expect exports will be a significant volumes growth driver for the company. On a consolidated basis, the management has set a target of earning 25% of the revenues from overseas market in the next two years, which in our opinion seems achievable. Currently, the contribution from the international business is around 18% on the consolidated level. This, together with the financing business, can provide some cushion against the cyclical nature of the automobile industry.

Capex: The expected capital expenditure for the next five years is around Rs 50 bn. A mix of debt and internal accruals will fund the requirements. It should be noted that the recent FCCB issue of the company has been for this purpose. Apart from this, TML is generating close to Rs 16 bn from operations. So funding does not seem to be an issue.

What to expect?
At Rs 463, the stock is trading at price to earnings multiple of 8.7 times our FY07 estimated earnings. We feel that based on our interaction with the management and the performance till date, there is a need to relook at the numbers of the company with a downwards bias towards the volume numbers. Having said that, we believe that the company has a sound business model with greater thrust not only on geographical reach and product diversification but also on providing a ‘one stop shop’ solution, which has been the trend in developed nations. This is one of the most important reasons for us to be positive on the company from a long-term perspective.

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