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Tata Motors: Back in the reckoning! - Views on News from Equitymaster
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Tata Motors: Back in the reckoning!
Oct 26, 2009

Performance summary
  • Standalone topline grows by a strong 13% YoY on the back of a 17% growth in volumes during the quarter
  • Operating margins expand by a strong 580 basis points as the company revels in a low inflation environment. Operating profits nearly double over the same quarter last year
  • Margin expansion coupled with new norms for forex accounting help the company post a dazzling growth of 110% in net profits during the quarter. Excluding forex losses, net profits witness a growth of nearly 26% YoY
  • Similar factors drive the company’s first half performance as profit grows by 85% YoY on the back of a modest 3% growth in sales


Standalone results
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Units sold (incl.traded vehicles) 135,037 158,575 17.4% 268,116 285,915 6.6%
Net sales 70,789 79,788 12.7% 140,073 143,835 2.7%
Expenditure 65,433 69,131 5.7% 129,795 125,897 -3.0%
Operating profit (EBDITA) 5,356 10,657 99.0% 10,278 17,937 74.5%
EBDITA margin (%) 7.6% 13.4%   7.3% 12.5%  
Other income 4,293 4,209 -1.9% 7,449 7,403 -0.6%
Interest (net) 1,483 2,856 92.6% 2,606 5,391 106.9%
Depreciation 2,133 2,788 30.7% 4,021 5,192 29.1%
Profit before tax 6,032 9,222 52.9% 11,099 14,757 33.0%
Extraordinary income/(expense) (2,452) (153)   (4,068) (209)  
Tax 110 1,777 1512.6% 300 2,120 606.6%
Profit after tax/(loss) 3,470 7,291 110.1% 6,731 12,429 84.7%
Net profit margin (%) 4.9% 9.1%   4.8% 8.6%  
No. of shares (m) 385.7 514.1   385.7 514.1  
Diluted earnings per share (Rs)*         30.6  
Price to earnings ratio (x)*         17.7  
(* on trailing twelve months earnings)

What has driven performance in 2QFY10?
  • The near 21% YoY growth in Tata Motors’ domestic CV (commercial vehicle) volumes played the key role in helping the company’s topline grow by 13% YoY during the quarter. Strong revival in the domestic industrial activity and availability of finance at attractive rates brought back CV operators, especially of the M&HCV (medium & heavy commercial vehicles) type back into the market. The company’s volume in this segment grew by 5.3% YoY, first positive growth in five quarters. In the process, Tata Motors also managed to increase its market share in the segment to nearly 67% from 65% prevailing in the corresponding quarter last year.

  • The company’s LCV (light commercial vehicle) segment performed even better during 2QFY10, growing its volumes by 33% YoY. This robust performance was driven by the continued strong performance of the ‘Ace’ range of vehicles and strong growth in higher tonnage LCV trucks and bus segment, which grew by 26% and 50% respectively. What is more, the company managed to increase its market share here as well, taking the same to 67% from 64% a year ago.

  • Growth in the PV (passenger vehicles) segment, which includes cars and utility vehicles, also came in pretty strong. This segment managed to grow its volumes by 27% during the quarter (including sales of Fiat and JLR vehicles). However, if one excludes sales of ‘Nano’, the growth stood at 12% YoY. The company managed to grow its small car volumes by 49% YoY whereas volumes in the mid-sized car segment and utility vehicles fell by 30% and 18% each. The company is expecting that the launch of its brand new ‘Indigo Manza’ might help revive growth in the mid-sized car segment.

  • With the company’s prime markets yet to come out of the slowdown, exports continued to struggle, registering a drop of 38% over the same quarter last year.

    Volumes: Domestic sales shine
    (Units) 2QFY08 2QFY09 2QFY10 (change)* 1HFY08 1HFY09 1HFY10 (change)*
    Domestic                
    M&HCV 36,121 32,961 34,796 5.6% 68,776 68,796 61,422 -10.7%
    LCV 35,051 41,299 54,848 32.8% 64,095 76,944 100,278 30.3%
    Utility Vehicles 9,657 9,318 7,637 -18.0% 19,697 21,684 15,702 -27.6%
    Cars 40,980 37,517 45,094 20.2% 82,780 76,245 82,866 8.7%
    Exports                
    M&HCV 3,745 2,859 3,248 13.6% 6,977 5,393 5,587 3.6%
    LCV 5,479 7,075 3,017 -57.4% 11,839 12,227 4,945 -59.6%
    Utility Vehicles 1,148 251 219 -12.7% 1,743 448 271 -39.5%
    Cars 3,408 2,696 1,519 -43.7% 7,043 3,972 2,420 -39.1%
    Total                
    M&HCV 39,866 35,820 38,044 6.2% 75,753 74,189 67,009 -9.7%
    LCV 40,530 48,374 57,865 19.6% 75,934 89,171 105,223 18.0%
    Utility Vehicles 10,805 9,569 7,856 -17.9% 21,440 22,132 15,973 -27.8%
    Cars 44,388 40,213 46,613 15.9% 89,823 80,217 85,286 6.3%
    Grand total 135,589 133,976 150,378 12.2% 262,950 265,709 273,491 2.9%
    (*2QFY10 upon 2QFY09)

  • At 13.4%, the company’s operating margins emerged as the best in the last 10 quarters. The improvement was driven by both lower raw material costs and price hikes taken by the company during the past few months. Consequently, operating profits witnessed a sharp improvement and grew by 99% over the previous corresponding quarter.

    Cost break-up…
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Raw materials 51,622 52,366 1.4% 101,511 95,146 -6.3%
    % sales 72.9% 65.6%   72.5% 66.1%  
    Staff cost 4,158 4,820 15.9% 8,167 8,804 7.8%
    % sales 5.9% 6.0%   5.8% 6.1%  
    Other expenditure 9,654 11,945 23.7% 20,117 21,947 9.1%
    % sales 13.6% 15.0%   14.4% 15.3%  

  • Tata Motors’ profit before taxes (PBT) grew by 53% YoY, though lower than the growth in operating profits. This was mainly on account of near doubling of interest expense. It should be remembered that the company’s borrowings increased substantially in the last one year and this led to the surge in interest expenses.

  • At 110%, growth in net profits has come in significantly higher than the growth in PBT mainly on account of significantly lower forex losses posted by the company. In fact, had the company followed the same policy of forex accounting, as in the 2QFY09, in the current quarter, growth in PAT would have come in at much lower figure of 22% YoY. The company’s tax rate has also increased significantly as it generated far lower tax free income over corresponding previous quarter.

What to expect?
At the current price of Rs 550, the stock trades at a multiple of 8.3 times our estimated FY12 standalone cash flow per share. The improvement in the company’s operational performance is indeed heartening. In fact, it has even exceeded our expectations by a significant margin. We would have to upgrade our topline and margin assumption for the company.

However, taking into consideration the run up that the stock has seen in the past few months, we don’t think that there is a significant upside left in the stock. Any meaningful dip in the stock price on the other hand, could make it a good long term bet. We will soon update our research report on the company.

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