Running on LCV, export demand

Updated: Oct 30 2005, 05:30am hrs
After a low key for the first quarter of the current fiscal, when revenues grew only 8.6%, Tata Motors Ltd (TML) registered a 15% growth during the second quarter ended September 30, 2005.

Much of this growth came about as a result of the growth in the commercial vehicle business, which rode on the new LCV model the Ace, and a rise in export volumes. Commercial vehicle volumes, which were depressed in the first quarter because of supply constraints and delays arising from certification for the new emission norms, rose 14% in the second quarter to 50, 115 units.

For the quarter, export volumes more than doubled to 13,994 units. Revenue from exports at Rs 934 crore, were up 74% and accounted for almost a fifth off overall revenues. The passenger cars business went down by 49% at 42,957 units and this remains a major area of concern. The company has lost its market share, which stands at 15.6% against 17.2% for the same period, previous year.

Demand

The commercial vehicle segment is closely linked to the economy. The fact that both industry and services grew at around 10% during the first quarter of the current fiscal shows has also given a boost to this segment.

Industrial growth based on Index of Industrial Production (IIP) went up from 6.2% during July 2005, to 7.4% during August 2005. Manufacturing remained the most buoyant segment, growing at 8.2%, up from 7.7% during the preceding month.

Yet the most critical risk to industrial performance arises from spiralling crude oil prices. Oil prices not only hamper industrial production but can also lead to high levels of inflationary pressures and higher interest rates. This itself can affect the sales of vehicles in general and commercial vehicles in particular. Tata Motors has already experienced a fall in the sales of passenger vehicles. But, if oil prices continue to be volatile, it might affect the finance rate in the country, which will affect the sales of the company.

While the floods in Maharashtra and Karnataka, the second- and fourth-largest markets in the country, did play a part in dampening sales, the company also claims that the year-ago quarter witnessed an extraordinary rise in sales as a result of a capacity expansion programme and the launch of the Indigo Marina.

With interest rates likely to firm up, it remains to be seen if the company can catch up to at least the consensus growth rate of 8-9% levels predicted for the passenger cars industry this fiscal.

Though the results for the quarter aren't strictly comparable with the year-ago quarter, since the current figures include those of Tata Finance too, the company says that the vehicle finance business accounted for only 1% of the revenues and 1% of the operating profits. Adjusted for the Tata Finance, growth in revenues from the core business was only 14%.

Operating profit (excluding contribution from other income) rose 13% to Rs 570.2 crore. Operating margin stood at 11.93%, down 23 basis points from the 12.16% registered in July-September 2004, due to continued pressures on the input costs like steel and oil, and a relatively modest volume growth. According to the company, the fall in margin was partially offset by an on going cost reduction. It has reported a Rs 338 crore net profit, up by 9.3% from same quarter last year.

However, a like-to-like comparison (i.e. excluding contributions from Tate Finance) shows that net profit grew 8.2% to Rs 334 crore and net profit margins fell 39 basis points to 7.07%. Basic earnings per share consequently fell to Rs 8.6 per share from the Rs 9 in the year-ago period.

Tata Motors' subsidiaries, like Tata Daewoo CV Ltd Korea and Telco construction, however, performed better. Revenues from subsidiaries were up 41% at Rs 785 crore. The profit after tax from its subsidiaries, too, doubled to Rs 54.3 crore for the September quarter.

Valuations

TML is traded at Rs 461 with a P/E of 13.50. Much P/E for companies operating in the same segment works out to 9x. Compared to this, the P/E of Tata Motors appears to be on the higher side.