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Tata Motors: Profits up 100 fold

Nov 10, 2010

Tata Motors announced its results for the quarter ended September 2010. The company’s consolidated revenues are higher by 37% YoY during the quarter, while profits are up by more than 100 fold. Here is our analysis of the results.

Performance summary
  • Company’s consolidated revenues increase by 37% YoY during 2QFY11, 49% YoY during 1HFY11. Growth led by the company’s standalone as well as Jaguar Land Rover businesses.
  • While revenues of Tata (and other brands; including spares and financing) increase by 36% YoY during the quarter, JLR’s revenues rise by 43% YoY.
  • Operating margins expand by 6.8% YoY on the back of lower input, employee as well as other expenses during both the periods (1QFY11 and 1HFY11). The expansion in margins is due to the strong operating performance of the JLR business.
  • Consolidated profits surge by over 100 fold during the quarter. During 1HFY11, the company recorded a net profit of Rs 42 bn as compared to a loss of Rs 3 bn during the corresponding period last year.

Consolidated financial performance
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 210,885 287,820 36.5% 375,614 558,376 48.7%
Expenditure 195,826 247,804 26.5% 355,527 479,805 35.0%
Operating profit (EBDITA) 15,059 40,016 165.7% 20,088 78,570 291.1%
Operating profit margin (%) 7.1% 13.9%   5.3% 14.1%  
Other income 4,067 195 -95.2% 7,278 541 -92.6%
Interest (net) 5,590 5,313 -5.0% 11,426 10,929 -4.3%
Depreciation 8,479 10,949 29.1% 16,922 21,064 24.5%
Exceptional items (2,184) 1,276   1,156 863 -25.3%
Profit before tax 2,873 25,227 778.2% 174 47,981  
Tax 2,894 3,131 8.2% 3,537 6,091 72.2%
Share of profit in associates 197 247 25.3% 200 403 101.8%
Minority interest 42 (113) -366.0% 93 (176) -288.3%
Profit after tax/(loss) 218 22,230 10106.6% (3,070) 42,117  
Net profit margin (%) 0.1% 7.7%   -0.8% 7.5%  
No. of shares (m)       514.1 570.8  
Diluted earnings per share (Rs)*         120.7  
P/E ratio (x)*         11.1  
*Adjusted for exceptional items

What has driven performance in 2QFY11?
  • Tata Motors put up a strong performance during the quarter ended September 2010. The increase in revenues was led by both - standalone automotive division as well as the JLR business. The company's overall standalone volumes increased by 31% to 207,645 units during the quarter. Volume surge was seen across segments. Commercial vehicle volumes (M&HCVs and LCVs) increased by 23% YoY to over 110,000 units, while passenger vehicle and utility vehicle volumes (including sales of FIAT vehicles) increased by 36% YoY during the quarter. There was a strong 81% YoY increase in exports during the quarter as well, led by higher CV volumes. Although the company lost some market share in the domestic CV segment during the quarter, it gained market share in the passenger cars sub-segments with higher sales volumes of models like Nano and Indigo Manza.

    As for the JLR business, the surge in revenues of 43% YoY was led by both higher volumes coupled with better realisations in the form of favourable foreign currency movements. This also led to a better than expected performance at the operating level as the company's EBIDTA margins stood in the region of 16% plus. In terms of retail volumes, total JLR sales were up by 21% YoY. Land Rover volumes were up by 22% YoY during the quarter, while that of Jaguar were up by 17% YoY. Growth in volumes was led by China, North America and Russia. On a quarter on quarter basis, total retail volumes for the combined entity were lower due to less demand from North America, China and Europe. Sales to Russia and UK however, were higher on a sequential basis.

    Segmental performance
    (Rs m)  2QFY10  2QFY11 Change  1HFY10  1HFY11 Change
    Tata and other brands*    91,242 124,283 36% 165,193      239,447 45%
    % of sales 43% 43%   44% 43%  
    PBIT     8,926    10,179 14%    13,555    21,533 59%
    PBIT margins 10% 8%   8% 9%
    Jaguar and Land Rover 113,178 161,725 43% 198,255 315,594 59%
    % of sales 53% 56%   52% 56%  
    PBIT -2430 18494.1 -  (11,163)   35,323 -
    PBIT margins -2% 11%   -6% 11%
    Others     7,931      3,669 -54%   14,829      7,156 -52%
    % of sales 4% 1%   4% 1%  
    Total# 212,351      289,676 36%      378,278 562,197 49%
    *Includes vehicles / spares and financing thereof;
    #Excludes inter segment revenues

  • Tata Motor's consolidated operating profits surged by 166% YoY on the back of a substantial improvement in JLR's operating performance. On an overall basis, all costs heads reduced as a percentage of sales during the quarter. But, when it comes to the performance of JLR versus that of the standalone business, the former took the cake this quarter. At the PBIT level, the UK subsidiary clocked PBIT margin of 11% as compared to a PBIT margin of negative 2% during the quarter ended September 2009. Apart from higher volumes and favourable foreign currency movements, the company's management is of the view that margins have improved on account of the various cost cutting measures that have been taken over the past year or so. In fact, JLR's performance was much better than that of Tata's standalone automotive division, which clocked PBIT margin of 8% as compared to 10% last year. Pressure in the standalone business was mainly due to higher input prices.

    Cost breakup...
    (Rs m)  2QFY10  2QFY11 Change  1HFY10  1HFY11 Change
    Raw materials      140,461       184,496 31.4%       253,027       354,968 40.3%
    % of sales 66.6% 64.1%   67.4% 63.6%  
    Staff cost 22,976  22,742 -1.0%  43,413  44,231 1.9%
    % of sales 10.9% 7.9%   11.6% 7.9%  
    Other expenditure 32,390  40,566 25.2% 59,086  80,607 36.4%
    % of sales 15.4% 14.1%   15.7% 14.4%  

  • Tata Motors' net profits increased by over 100-fold during the quarter, led by a strong operating performance. In addition, favourable forex gains, lower interest, a not so sharp increase in depreciation as well as lower tax outgo aided the company at the bottomline level. Excluding the onetime exceptional gains (and loss of last year), profits are higher by 772% YoY. Further, it must be noted that the company earned other income of more than Rs 4 bn (mainly on account of sale of investments) during the quarter September 2009. Other income during the latest quarter stood at a relatively miniscule amount of Rs 195 m. At the standalone level, Tata Motors profits came in lower by 41% YoY. Apart from a poor operating performance (operating profits up by only 4% YoY during the quarter), lower other income during the quarter led to a sharp decline in profits.

  • As for the performance during 1HFY11, the company's revenues came in higher by 49% YoY, again on the back of a strong performance of the standalone and JLR businesses. Operating profits during the period increased by 291% YoY as margins expanded to 14.1% from 5.3% last year. Again, all costs heads were lower (as a percentage of sales) as compared to last year. At the net level, Tata Motors' consolidated profits stood at Rs 42 bn as compared to a loss of Rs 3.1 bn last year.

What to expect?
At the current price of Rs 1,334, the stock trades at a multiple of 11x its consolidated trailing twelve month earnings. The auto industry in India is seeing input cost pressures at the moment and Tata Motors is no different. This is a key reason for the fall in operating margins. However, at the same time, a positive for the company is the demand for vehicles remaining robust across the various segments of the company. Factors such as high growth levels in the Indian economy, better performance from the agriculture segment, higher levels of industrial growth, stable freight rates, amongst others, will drive the demand for the company's vehicles, especially the CV segment. However, with a handful of new players entering the market, competition will intensify.

As for JLR's performance, it continues to remain robust on the back of strong demand for the new launches from various geographies. However, as mentioned earlier, we believe that it is times such as these where the tendency to value JLR on the basis of its recent performance is at its highest. Notwithstanding its current performance, the JLR business is indeed quite cyclical in nature and also a capital intensive one at that. Thus, the temptation to view it on the basis of just its recent financials should be avoided and instead, a long run view should be taken.

As far as our view is concerned, we feel the need to revise our estimates. We will update our research report soon.

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