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Tata Motors: JLR fuels growth

Nov 15, 2011

Tata Motors announced the second quarter results of financial year 2011-2012 (2QFY12). The company's consolidated revenues grew by 27% YoY during the quarter, while net profits fell by 16% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated revenues rise by 27% YoY during 2QFY12 largely led by growth from its Jaguar Land Rover business.
  • Revenues of Tata (and other brands; including spares and financing) increase by 19% YoY during the quarter, while JLR's revenues grow by 34% YoY (not adjusted for intersegment revenues).
  • Operating profit growth at 13% YoY is slower than the growth in sales due to decline in operating margins to 12.4% during the quarter.
  • Consolidated profits fall by 16% YoY during the quarter due to extraordinary losses this quarter as compared to gains in 2QFY11. Excluding this impact, growth in net profits stands at 11% YoY.

Consolidated financial performance
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 285,192 361,975 26.9% 553,993 694,863 25.4%
Expenditure 245,176 316,936 29.3% 475,423 607,466 27.8%
Operating profit (EBDITA) 40,016 45,039 12.6% 78,570 87,398 11.2%
Operating profit margin (%) 14.0% 12.4%   14.2% 12.6%  
Other income 195 608 211.4% 541 1,369 153.1%
Interest (net) 5,313 5,251 -1.2% 10,929 12,910 18.1%
Depreciation 10,949 13,308 21.6% 21,064 24,740 17.5%
Profit before tax 23,951 27,089 13.1% 47,118 51,117 8.5%
Exceptional items 1,276 (4,390)   863 (4,960)  
Tax 3,131 3,630 16.0% 6,091 7,150 17.4%
Share of profit in associates 247 40 -84.0% 403 136 -66.3%
Minority interest (113) (335)   (176) (374)  
Profit after tax/(loss) 22,230 18,773 -15.5% 42,117 38,770 -7.9%
Net profit margin (%) 7.8% 5.2%   7.6% 5.6%  
No.of shares (m)         3,173.8  
Diluted earnings per share (Rs)*         29.3  
P/E ratio (x)*         6.3  
* On a trailing 12 months basis

What has driven performance in 2QFY12?
  • Tata Motors' consolidated revenues increased by 27% YoY during the quarter. The revenue growth was led by the standalone business (up 19% YoY) as well as the Jaguar Land Rover (JLR) business (up 34% YoY). The company's standalone business was driven by the commercial vehicle segment, whose volumes increased by 18% YoY. Within the CV space, volumes were driven by the LCV segment (27% YoY) led by strong consumption demand, while volumes in the MHCV segment grew by a mere 5% YoY. High interest rates, fuel price hikes, and slowdown in economic growth moderated growth in the MHCV segment.

    On the other hand, passenger vehicle and utility vehicle volumes (including JLR vehicles) in the domestic market fell by 21% YoY during the quarter on account of rising interest rates, fuel price hikes and intense competition. Other than the JLR vehicles, Tata Venture and the compact car segment, which witnessed growth in sales, most other segments in the passenger vehicles space witnessed a decline. The small car segment was the worst hit as volumes plunged 67% YoY.

    There was a 12% YoY increase in exports during the quarter, led by higher CV volumes (up 20% YoY). Tata Motors' market share in the commercial vehicle space stood at 59.5% while that in passenger vehicles was 11.6%. The company took cumulative price increase of 1% on commercial vehicles during the quarter.

    As for the JLR business, global wholesale volumes during the quarter witnessed a growth of 23% YoY. While Jaguar volumes decreased by 7% YoY, Land Rover volumes increased by 34% YoY. Growth was largely led by China.

  • Segmental performance
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Tata and other brands* 121,655 144,982 19% 235,065 278,255 18%
    % of sales 42% 40%   42% 40%  
    PBIT 10,179 8,996 -12%          21,533 18,285 -15%
    PBIT margins 8% 6%   9% 7%  
    Jaguar and Land Rover 161,725 216,023 34% 315,594 413,785 31%
    % of sales 56% 59%   57% 60%  
    PBIT 18,494 22,350 21% 35,323 43,484 23%
    PBIT margins 11% 10%   11% 11%  
    Others 3,669 4,565 24% 968 1,158 20%
    % of sales 1% 1%        
    Total# 287,048 365,570 27% 551,627 693,198 26%
    *Includes vehicles / spares and financing thereof; #Excludes inter segment revenues

  • Tata Motors' consolidated operating profits grew by 13% YoY, slower than the growth in sales as operating margins contracted to 12.4% in 2QFY12 as compared to 14% during 2QFY11. Higher input cost was the culprit as raw material prices increased from 63.9% of sales in 2QFY11 to 64.3% of sales in 2QFY12. Margins of both the standalone business as well as the JLR business were under pressure. The company had upped prices during the quarter which helped in softening the pressure from high input costs to some extent.

  • Cost break-up...
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw materials 184,496 241,388 30.8% 354,968 460,741 29.8%
    % of sales 64.7% 66.7%   64.1% 66.3%  
    Staff cost 22,742 28,656 26.0% 44,231 54,580 23.4%
    % of sales 8.0% 7.9%   8.0% 7.9%  
    Product development expenses 1,921 3,115 62.2% 2,991 5,589 86.9%
    % of sales 0.7% 0.9%   0.5% 0.8%  
    Other expenditure* 36,017 43,777 21.5% 73,234 86,556 18.2%
    % of sales 12.6% 12.1%   13.2% 12.5%  
    Total 245,176 316,936 29.3% 475,423 607,466 27.8%
    *Including amount capitalised

  • Tata Motors' consolidated net profits fell by 16% YoY during 2QFY12. This was on account of an extraordinary loss this quarter as compared to gains in 2QFY11. Excluding this impact, growth in net profits stood at 11% YoY, more or less in line with the operating profit growth helped by higher other income and lower interest costs.

What to expect?
At the current price of Rs 173, the stock is trading at a multiple of 6.3 times its trailing twelve month consolidated earnings per share. Going forward, Tata Motors intends to focus on improving its product portfolio and customer service in an environment where competitive pressures have increased. The focus will also be on reducing costs. Having said that, factors such as rising input costs, interest rates, fuel costs will likely add pressure to the auto industry's growth in the medium term and Tata Motors will not be immune from the same. Entering into new long term raw material contracts will play a key role in the company's profitability going forward.

As for JLR's performance, while it has improved, we stick to our view of JLR being cyclical in nature and also a capital intensive one and thus believe that viewing it on the basis of just its recent financials should be avoided. Although the growth prospects for the company look good from a long term perspective, valuations at the current levels do not leave much on the table for investors.

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