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Tata Motors: The two-diamond glitter - Views on News from Equitymaster
 
 
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  • Oct 29, 2004

    Tata Motors: The two-diamond glitter

    Performance Summary
    Tata Motors, India’s largest CV (commercial vehicle) manufacturer, has announced impressive 2QFY05 numbers. Riding on the back of a strong 31% YoY growth in topline, the bottomline has grown at a higher rate of 50%, thanks mainly to a more than three-fold jump in other income and lower tax provisioning. Operating margins however, have come under pressure. For the half yearly period, the growth in topline and bottomline stood at 36% and 74% YoY respectively.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 31,766 41,471 30.5% 56,775 77,211 36.0%
    Expenditure 27,488 36,428 32.5% 49,296 68,141 38.2%
    Operating profit (EBDITA) 4,278 5,042 17.9% 7,479 9,071 21.3%
    EBDITA margin (%) 13.5% 12.2%   13.2% 11.7%  
    Other income 228 706 209.9% 333 1,118 236.1%
    Interest (net) 260 398 53.1% 798 814 2.0%
    Depreciation 932 1,068 14.6% 1,862 2,052 10.2%
    Profit before tax 3,314 4,282 29.2% 5,152 7,324 42.2%
    Extraordinary item (29) (10)   (230) (21)  
    Tax 1,218 1,180 -3.2% 1,852 1,977 6.8%
    Profit after tax/(loss) 2,067 3,092 49.6% 3,070 5,326 73.5%
    Net profit margin (%) 6.5% 7.5%   5.4% 6.9%  
    No. of shares (m) 320.6 359.1   320.6 359.1  
    Diluted earnings per share (Rs)* 23.0 34.4   17.1 29.7  
    Price to earnings ratio (x)   12.1     14.0  
    (* annualised)            

    Background
    Tata Motors (Telco) is India's largest commercial vehicle (M/HCVs and LCVs) manufacturer, with a market share of 59% and second largest producer of passenger vehicles. Its plants are located at Pune, Jamshedpur and Lucknow. It has entered into an agreement with Rover, UK for supply of 100,000 plus passenger car over a five-year period. This agreement was later extended to include UVs and pick-up trucks. From a net loss of Rs 5 bn in FY01 to a profit of Rs 8.1 bn in FY04, the company has come a long way. It recently acquired the CV division of South Korean auto major Daewoo and this is likely to help the company to augment growth in the higher tonnage CVs, an area that holds considerable promise in the future.

    What has driven performance in 2QFY05?
    Robust off take in Cars and CVs: Both the major divisions of the company viz. CVs (18% YoY) and passenger vehicles (23% YoY) have seen higher volume growth during the quarter. As far as CV sector is concerned, for the third straight year, volumes have grown at near 30% levels. The demand is being fueled by higher economic growth, lower interest rate regime and construction of better road network. Replacement demand has also continued to remain strong, a fact borne out of the information that the previous cyclical upturn happened way back in FY97. Tata Motors, by virtue of its market leadership and presence across the entire CV spectrum, has benefited immensely from such a trend. After increasing market share in FY04, the company has continued to do so during the current year as well. For the half-year period, its growth at 30% was slightly higher than the overall industry growth of 29%.

    On the passenger vehicles front, the 23% growth in volumes was led largely by cars, whose sales rose by 29% YoY. Sales of UVs on the other hand, witnessed a marginal fall of 1%. Through Indica, its offering in the small car segment, the company seems to have successfully answered the need of consumers who were on the look out for a small affordable diesel car. This is further evident by the steady climb in its market share from 8% of all the passenger vehicles sold in the country in FY01 to 11% in FY04. The positive trend has continued this year also. Besides, Indigo, the company’s mid sized sedan, is also receiving a very favorable response. Further, being manufactured on the same platform as Indica, it is also helping the company to utilize its capacities more effectively.

    Segmental break-up
      Domestic Exports
    Segment 2QFY04 2QFY05 % change 2QFY04 2QFY05 % change
    M & HCV 25,101 30,514 21.6% 1,135 1,608 41.7%
    LCV 12,310 13,554 10.1% 1,689 3,237 91.7%
    Total CVs 37,411 44,068 17.8% 2,824 4,845 71.6%
    U.Vs 7,755 7,652 -1.3% 425 857 101.6%
    CARS 29,102 37,511 28.9% 613 643 4.9%
    Total 74,268 89,231 20.1% 3,862 6,345 64.3%

    Raw material pressure: The company seems to have finally borne some brunt of higher raw material prices, as they have accounted for a larger chunk of the company’s topline as compared to same quarter last year. Prices of all the key inputs like steel, rubber and plastic have risen sharply in the past few months and this has put pressure on operating margins (down 130 basis points).

    While higher operating expenses have dented the company’s performance at the operating profit level, a more than three fold jump in other income has enabled the company to post a strong 29% growth at the PBT levels. Lower tax outgo as compared to same quarter last year, has further pushed the bottomline growth to 50%.

    Cost break-up…
    (Rs m) 2QFY04 2QFY05 %Change 1HFY04 1HFY05 %Change
    Raw materials 20,693 28,026 35.4% 36,660 51354 40.1%
    % sales 65.1% 67.6%   64.6% 66.5%  
    Staff cost 2,152 2,590 20.4% 4,007 4951 23.6%
    % sales 6.8% 6.2%   7.1% 6.4%  
    Other expenses 4,644 5,813 25.2% 8,629 11836 37.2%
    % sales 14.6% 14.0%   15.2% 15.3%  

    What to expect?
    At Rs 416, the stock trades at a P/E multiple of 14 times its annualised 1HFY05 earnings. Though growth in CV sales is likely to be lower in the long-term, we believe that the company is well placed to consolidated its presence. Besides, its recent acquisition of Daewoo’s CV division strengthens its presence in the higher end of the CV chain and is readying itself for increasing competition in the domestic market. As far as risks are concerned, both CVs as well as passenger car industry are cyclical in nature. Though car volumes are growing, whether the company will be able to maintain margins remains to be seen.

     

     

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