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Tata Motors: Pressure quarter - Views on News from Equitymaster

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Tata Motors: Pressure quarter
Oct 31, 2007

Performance summary
  • Standalone topline registers a growth of 2% YoY during the quarter despite the 3% drop in volumes

  • Forex gains leads to EBITDA margin expansion of 80 basis points and operating profits growth of 9% YoY. Excluding the same, margins expand by a mere 30 basis points and operating profits grow 5% YoY

  • Stagnant interest expense and a 35% fall in tax outgo helps bottomline grow 19% YoY during the quarter

  • Half yearly profits grow 21% YoY on the back of a 3% growth in topline

  • Consolidated revenues as well as net profits have risen by 6% YoY in 2QFY08

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Units sold (000's) 139,221 135,589 -2.6% 265,375 262,950 -0.9%
Net sales 65,718 66,727 1.5% 123,552 127,295 3.0%
Expenditure 58,310 58,659 0.6% 109,881 111,898 1.8%
Operating profit (EBDITA) 7,408 8,068 8.9% 13,671 15,396 12.6%
EBDITA margin (%) 11.3% 12.1%   11.1% 12.1%  
Other income 848 707 -16.7% 1,707 1,570 -8.1%
Interest (net) 956 965 1.0% 1,681 1,781 5.9%
Depreciation 1,435 1,597 11.3% 2,845 3,072 8.0%
Profit before tax 5,866 6,212 5.9% 10,852 12,114 11.6%
Extraordinary income/(expense) (2)     (6) 20  
Tax 1,447 944 -34.8% 2,611 2,197 -15.8%
Profit after tax/(loss) 4,417 5,268 19.3% 8,236 9,936 20.6%
Net profit margin (%) 6.7% 7.9%   6.7% 7.8%  
No. of shares (m) 376.2 385.5   376.2 385.5  
Diluted earnings per share (Rs)*         52.8  
Price to earnings ratio (x)**         14.1  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Tata Motors (Telco) is India's largest commercial vehicle (CVs) manufacturer, with a domestic market share of an imposing 65% in FY07 and second largest producer of passenger vehicles (16% of domestic demand in FY07). Its plants are located at Pune, Jamshedpur and Lucknow. From a net loss of Rs 5 bn in FY01 to a profit of Rs 19 bn in FY07, the company has come a long way. It acquired the CV division of South Korean auto major Daewoo in FY04 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. Similarly, company has also acquired a 21% stake in Hispano, a Spanish company, with an option to acquire the rest of the 79%. The company has earmarked a huge capex to the tune of Rs 120 bn, to be fully invested till FY10-FY11. On the anvil are a new Rs 1 lakh car, a global truck and a new UV platform.

What has driven performance in 2QFY08?
Disappointing volumes: Company’s volumes fell nearly 3% YoY during the quarter, led primarily by the decline in domestic sales of two of its key segments viz. M&HCVs and passenger cars. Additionally, in both the segments, the company lagged the markets in terms of growth and hence, also lost market share. In the M&HCV segment, company’s volumes fell 11% YoY on the back of a cyclical downturn and a tight interest rate scenario. In passenger cars however, the damage was more self-inflicted as lack of new offerings failed to entice customers and the company’s volumes fell 4% on a YoY basis. In contrast to this, led largely by new launches, the industry managed to rake in a growth of 14% YoY during the quarter. While sales of UVs also declined, LCVs provided the company with the only solace as far as volumes growth is concerned. Thanks to the continued success of ‘Ace’, Tata Motors recorded a volume growth of 15% YoY in this segment during the quarter. Exports of the company came in slightly higher on a YoY basis, thanks mainly to significant growth in M&HCV and UV exports. Growth in value terms was higher than the overall volumes growth because of the price hikes the company had undertaken during the quarter

Volumes: Not looking good!
(Units) 2QFY06 2QFY07 2QFY08 (change)* 1HFY06 1HFY07 1HFY08 (change)*
Domestic
M&HCV 29,052 40,787 36,121 -11.4% 52,051 77,394 68,776 -11.1%
LCV 21,063 30,443 35,051 15.1% 35,300 56,978 64,095 12.5%
Utility Vehicles 8,242 11,506 9,657 -16.1% 15,585 19,923 19,697 -1.1%
Cars 34,711 42,882 40,980 -4.4% 68,558 84,371 82,780 -1.9%
Exports
M&HCV 1,882 2,566 3,745 45.9% 3,271 4,839 6,977 44.2%
LCV 6,001 6,077 5,479 -9.8% 10,326 11,539 11,839 2.6%
Utility Vehicles 478 421 1,148 172.7% 545 927 1,743 88.0%
Cars 5,657 4,539 3,408 -24.9% 8,949 9,404 7,043 -25.1%
Total
M&HCV 30,934 43,353 39,866 -8.0% 55,322 82,233 75,753 -7.9%
LCV 27,064 36,520 40,530 11.0% 45,626 68,517 75,934 10.8%
Utility Vehicles 8,720 11,927 10,805 -9.4% 16,130 20,850 21,440 2.8%
Cars 40,368 47,421 44,388 -6.4% 77,507 93,775 89,823 -4.2%
Grand total 107,086 139,221 135,589 -2.6% 194,585 265,375 262,950 -0.9%
(*2QFY08 upon 2QFY07)

Squeezing more out of less: Company’s operating margins have expanded by 80 basis points, attributed solely to a sizeable drop in other expenses as a percentage of sales. However, this is not the true picture. Included in other expenses is a gain of Rs 309 m that the company has recorded on its dollar denominated loans. If one excludes the same, then the operating margin expansion stands at 30 basis points

Cost break-up…
(Rs m) 2QFY07 2QFY08 Change
Raw materials 45,281 46,037 1.7%
% sales 68.9% 69.0%  
Staff cost 3,427 3,694 7.8%
% sales 5.2% 5.5%  
Other expenditure 9,603 8,928 -7.0%
% sales 14.6% 13.4%  

Bottomline growth at 19% YoY, which is higher than the 9% YoY growth in operating profit is a consequence of relatively lower growth in interest expenses and lower effective tax rates.

Over the last few quarters: As can be seen from the table below, while the topline growth has come under pressure, the company has done well to keep margin fall under check. Tight control on costs and a prudent capital structure has enabled the company to avoid any adverse movement in margins.

Over the last few quarters…
  2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Net sales (YoY growth %) 37.4% 37.1% 20.1% 4.7% 1.5%
OPM 11.3% 13.7% 11.3% 12.1% 12.1%
NPM 6.7% 7.4% 7.0% 7.7% 7.9%

What to expect?
At the current price of Rs 746, the stock is trading at a multiple of 9.1 times our estimated FY10 cash flow. Market leadership in CVs and an exciting pipeline of products in the passenger vehicles segment makes us positive about the long-term prospects of the company. Not to forget the value unlocking from a few of its subsidiaries. Thus, while in the medium term, we might see a subdued performance, long-term prospect looks rosy.

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