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Tata Motors: A tepid quarter - Views on News from Equitymaster
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Tata Motors: A tepid quarter
Nov 22, 2014

Tata Motors has announced its results for the second quarter ended September 2014 recently. Revenues grow by 7% YoY, while net profits fall by 7% YoY on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Net sales grow by 6.5% YoY on a consolidated basis as volumes of JLR turn out to be tepid.
  • Operating margins improve marginally by 0.6% to 15.8% YoY during the quarter on account of the substantial fall in other expenditure (as percentage of sales).
  • Although operating profits grow by 11% YoY, net profits fall by 14% YoY (excluding extraordinary items) on account of the surge in tax expenses.

Consolidated financial snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 568,668 605,642 6.5% 1,036,632 1,252,470 20.8%
Expenditure 482,205 509,977 5.8% 887,834 1,045,381 17.7%
Operating profit (EBDITA) 86,463 95,665 10.6% 148,798 207,089 39.2%
EBDITA margin (%) 15.2% 15.8%   14.4% 16.5%  
Other income 2,328 2,184 -6.2% 4,158 4,316 3.8%
Finance costs 11,125 9,272 -16.7% 20,614 18,688 -9.3%
Depreciation 27,369 32,134 17.4% 50,924 61,930 21.6%
Exceptional items (2,738) 264   (4,525) 1,204  
Profit before tax 47,558 56,707 19.2% 76,893 131,992 71.7%
Tax 11,940 23,639 98.0% 23,596 44,790 89.8%
Profit after tax/(loss) 35,617 33,068 -7.2% 53,298 87,202 63.6%
Share of profits of associates (92) 35   (314) 83  
Minority interest (106) (194)   (304) (394)  
Net profit after taxes 35,419 32,909 -7.1% 52,679 86,891 64.9%
Net profit margin (%) 6.2% 5.4%   5.1% 6.9%  
No. of shares (m)         3,189.9  
Diluted earnings per share (Rs)*         52.4  
Price to earnings ratio (x)*         10.2  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 2QFY15?
  • Tata Motors reported a subdued revenue growth of 6.5% YoY for the quarter. The growth was led by JLR (up 4% YoY) while the standalone entity posted a decline of 1% YoY.

  • For the standalone entity (Indian operations), the sales volumes (including exports) in both commercial and passenger segment declined during the quarter. Having said that, the scenario within the CV industry itself was mixed. For instance, positive business sentiment, firm freight rates, extended lower excise duty and low base effect bolstered volumes of MHCVs. However, subdued infrastructure and financing activities, constraints on financing and high interest rates impacted the demand for the LCV segment. Overall, in the CV segment, the company's market share stood at 50.3% during the quarter. The passenger vehicles segment saw volumes fall by 8.5% YoY during the quarter.

  • The wholesale and retail sales volumes for JLR grew by 2% YoY and 8% respectively for the quarter driven by Range Rover Sport, Range Rover and Jaguar F Type. In terms of geographies, strong growth was seen in China and Asia Pacific, which accounted for 27% and 6% of sales respectively during the quarter as against 26% and 4.8% respectively in 2QFY14.

  • The overall operating margins improved by 0.6% to 15.8% YoY on account of the decline in other expenditure (as percentage of sales). EBIDTA margins of JLR particularly expanded on account of increase in volumes, a rich product mix and a favourable geographical mix.

  • Although operating profits grew by 11% YoY, net profits fell by 14% YoY (excluding extraordinary items) on account of the surge in tax expenses.
What to expect?
At the current price of Rs 532, the stock trades at a multiple of 10.2 times its trailing twelve month earnings on a consolidated basis (excluding extraordinary items). Tata Motors expects auto sales to ramp up from the latter half of FY15. The company also expects the volumes of MHCVs to pick up progressively from the third quarter onwards. Meanwhile, JNNURM Phase 2 orders are expected to boost bus volumes. In the passenger vehicles space, the company has a slew of launches lined up, which is a positive sign. Indeed, one of the reasons why Tata Motors has lost market share in the PV segment is lack of new product launches as compared to its peers and the company is looking to correct this going forward. Thus, marketing costs are expected to stay high.

As far as JLR is concerned, sales momentum is likely to continue with new product launches. The company will be investing in new products and technologies as well as capacity expansion. In light of the current valuations, we are of the view that investors should not buy the stock at the current price levels.

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