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Telco: Topline grows 47% YoY

Oct 29, 2003

Tata Motors (Telco), formerly Tata Engineering, has posted a sharp rise in net profit for the second quarter ended September 2003. While net sales has risen by 47%, the rise in net profit is even higher at 252% YoY. Benefits of continuation in demand for commercial vehicle (CV) and new product launches in the passenger car segment have benefit Telco significantly.

(Rs m) 2QFY03 2QFY04 Change
Sales 21,612 31,766 47.0%
Other Income 40 228 470.9%
Expenditure 18,842 27,488 45.9%
Operating Profit (EBDIT) 2,770 4,278 54.4%
Operating Profit Margin (%) 12.8% 13.5%  
Interest 831 260 -68.7%
Depreciation 900 932 3.6%
Profit before Tax 1,079 3,314 207.1%
Extraordinary item - (29) -
Tax 491 1,218 36.8%
Profit after Tax/(Loss) 588 2,067 251.5%
Net profit margin (%) 2.7% 6.5%  
No. of Shares (m) 319.8 319.8  
Earnings per share (Rs)* 7.4 25.8  
P/E (x)   14.2  

Total volumes in 1HFY04 has risen by 44% to 138,520 units, primarily led by significant rise in CV sales. Despite a 30% rise in industry sales in FY03, the momentum has continued in 1HFY04 as well. Given this backdrop, against our earlier estimate of 7%-8% growth in industry volumes, there is a need to revise our numbers upwards to 9%-10% for this fiscal year. After losing consistently to competitors like M&M and Toyota on the utility vehicle (UV) segment front, Telco has managed to arrest the decline and grow volumes in 2QFY04. This was on the back of the launch of the new goods carrier and re-launch of 'Sumo', the top selling UV for the company.

Volume snapshot…
(Units) 2QFY03 2QFY04 Change (%)
M&HCV 32,279 44,374 37.5%
LCVs 15,988 24,086 50.7%
Utility vehicles 12,704 15,191 19.6%
Cars 35,159 54,869 56.1%
Total 96,130 138,520 44.1%
Source: Company website

On the passenger car front, Tata Indigo (the sedan) has been clocking monthly volumes of more than 2,000 units. This has benefited Telco is raising its volume growth on the car front to 56% in 2QFY04. With shipments to Rover slated to commence in 2HFY04, volume growth could be on the higher side. This would be in line with our FY04 estimates of 100,013 units.

Despite higher raw material cost as a percentage of sales (65% in 2QFY04 as compared to 51% in 2QFY03), Telco has managed to improve margins in the same period. This is on account of benefits coming from high capacity utilisation and cost rationalisation in both CV and car divisions. Just to put things in perspective, the break-even point for the CV and car divisions stood at 31% and 48% respectively in FY03 (36% for CVs and 62% for car division respectively in FY02). Against the level in 2QFY04, we expect operating margins at 13% levels for FY04.

Interest cost has declined significantly as the company is expected to retire debts to the tune of Rs 5 bn in FY04. Higher cash flow from operations and surplus cash arising from the overseas issue is reflected partly in higher other income. This has helped Telco to post a 252% rise in net profit for 2QFY04.

The stock currently trades at Rs 366 implying a P/E multiple of 14.2x annualised 2QFY04 earnings (19.1x FY04E earnings). While we expect the company to post a 100% rise in net profit for FY04, we believe that valuations are high considering the cyclical nature of the industry. Capital expenditure requirements are also expected to be on the higher side for the next three years at around 5% of sales in both CV and car divisions. Given the competitive environment combined with the entry of new players in the CV segment, one should exercise caution.

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