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Tata Motors: Dream run continues but… - Views on News from Equitymaster

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Tata Motors: Dream run continues but…
Oct 30, 2006

Performance Summary
Tata Motors, India’s leading manufacturer of commercial vehicles and passenger cars, has posted decent set of numbers for 2QFY07. Robust volume growth has resulted into a 37% YoY growth in topline during the quarter. Cost pressures have however shrunk the operating margins by 60 basis points. Although the financing costs have increased considerably, rise in other income has been able to offset the same thus resulting into a 31% growth in bottomline. Cost and financing related pressure also affected the 1HFY07 performance of the company as the bottomline growth remained at 35% YoY despite the 43% rise in half yearly topline.

Financial performance: Standalone snapshot
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 47,813 65,718 37.4% 86,594 123,552 42.7%
Expenditure 42,111 58,310 38.5% 76,088 109,881 44.4%
Operating profit (EBDITA) 5,702 7,408 29.9% 10,506 13,671 30.1%
EBDITA margin (%) 11.9% 11.3%   12.1% 11.1%  
Other income 580 848 46.2% 1,163 1,707 46.8%
Interest (net) 461 956 107.5% 971 1,682 73.3%
Depreciation 1,272 1,435 12.8% 2,539 2,846 12.1%
Profit before tax 4,550 5,866 28.9% 8,160 10,851 33.0%
Extraordinary income/(expense) (10) (2)   (20) (6)  
Tax 1,161 1,447 24.6% 2,035 2,611 28.3%
Profit after tax/(loss) 3,379 4,417 30.7% 6,105 8,234 34.9%
Net profit margin (%) 7.1% 6.7%   7.1% 6.7%  
No. of shares (m) 376.2 376.2   376.2 383.0  
Diluted earnings per share (Rs)* 35.9 47.0   31.9 43.0  
Price to earnings ratio (x)**         18.7  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Tata Motors (Telco) is India's largest commercial vehicle (M/HCVs and LCVs) manufacturer, with a market share of 62% in FY06 (59% in FY04) and second largest producer of passenger vehicles. Its plants are located at Pune, Jamshedpur and Lucknow. From a net loss of Rs 5 bn in FY01 to a profit of Rs 15 bn in FY06, 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 2QFY07?

Volumes: All round growth!
(Units) 2QFY05 2QFY06 2QFY07 (change)*
Domestic
M&HCV 35,901 29,052 40,787 40.4%
LCV 9,821 21,063 30,443 44.5%
Utility Vehicles 6,982 8,242 11,506 39.6%
Cars 37,774 34,711 42,882 23.5%
Exports
M&HCV 1,307 1,882 2,976 58.1%
LCV 1,360 6,001 6,122 2.0%
Utility Vehicles 956 478 420 -12.1%
Cars 639 5,657 4,539 -19.8%
Total
M&HCV 37,208 30,934 43,763 41.5%
LCV 11,181 27,064 36,565 35.1%
Utility Vehicles 7,938 8,720 11,926 36.8%
Cars 38,413 40,368 47,421 17.5%
Grand total 94,740 107,086 139,675 30.4%
(*2QFY07 upon 2QFY06)

Buoyancy across all segments: Tata Motors sold 30% more vehicles in the domestic and exports markets combined as compared to same quarter last year. Here, while domestic sales increased by 35%, exports remained almost flat. In the domestic market, company outperformed the industry in all the segments where it has a presence.

Continued success of its mini-truck ‘Ace’ and buoyancy in the CV segment has enabled the company to grow its M&HCV and LCV sales by 40% and 45% respectively in the Indian market. This is significantly higher than the industry growth rate of 30% and 27%. As a consequence of this second straight quarter of industry outperformance, the market share of the company in the overall CV segment improved from 58% to an even more impressive 65% during 1HFY07 on a YoY basis.

Concerned with the rather sedate performance of its UV division, the company adopted the strategy of slashing the price of its ‘Safari’ range of UVs and relaunching the same. The move has paid rich dividends as UV sales of the company recorded an impressive jump of 40% YoY during the quarter. This growth came in much higher than the industry growth rate of 22%. On the passenger car front, the company recorded 24% growth in volumes as against the industry growth rate of 18%. Apart from its flagship offering Indica, a face-lifted Indigo Sedan and Indigo Marina range of vehicles enabled the company to register strong growth in volumes in the passenger car segment.

CV: Market share

Marginal contraction in operating margins: If the cost structure for the quarter is any indication, then Tata Motors seems to have paid a small price for its focus on volume growth. Despite all its cost reduction efforts, raw material costs and other expenses as a percentage of sales have witnessed a small expansion and hence have put pressure on the company’s operating margins. Also, rise in key input costs such as steel, rubber and other metals, has taken away some of its benefits of the cost reduction program. Although by way of a small reduction in staff costs (as a percentage of sales), it has managed to take some pressure off margins; the drop is still not enough to prevent the 60 basis points fall in operating margins.

Cost break-up…
(Rs m) 2QFY06 2QFY07 Change
Raw materials 32,611 45,281 38.9%
% sales 68.2% 68.9%  
Staff cost 2,742 3,427 25.0%
% sales 5.7% 5.2%  
Other expenditure 6,758 9,603 42.1%
% sales 14.1% 14.6%  

Other income offsets high financing costs: Capital seems to have become costly for the company, as its interest bill has risen by a significant 108%. However, this did not have an impact on bottomline, as other income managed to offset most of it by clocking a growth of 46% YoY. As a result of the higher other income, growth in bottomline at 31% YoY has been marginally higher than the operating profit growth of 30% YoY.

What to expect?
At the current price of Rs 855, the stock is trading at a rich price to earnings multiple of 19 times trailing twelve months earnings. Although, the growth in volumes has been commendable, the investments required to maintain the same are quite sizeable and this will make the company vulnerable to any slowdown in the CV industry. Hence, in the absence of adequate cash flows to fully meet its capex requirements, the company might struggle to maintain the robustness in its bottomline and as such we remain cautious on the stock from a medium term perspective.

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