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Raghuvir Srinivasan

An Ace up Tata Motors' sleeve?

THE strain from rising input costs not fully passed on to the market is beginning to show on the financials of Tata Motors.

Despite a smart 29 per cent rise in sales during the fourth quarter of 2004-05, operating profits inched up by a small 3 per cent only, while profit before tax and exceptional items showed an even smaller increase of 2 per cent.

The post-tax profit (Rs 362 crore) growth of 33 per cent was possible only because of a lower charge in terms of taxes and exceptional items.

The sharp three-percentage-point fall in operating margin during the fourth quarter to 12 per cent tells the tale.

For the whole year 2004-05, operating margin was down to 12.5 per cent from 14.2 per cent in 2003-04 — a clear reflection of the pressure from higher raw material costs. That raw material cost as a percentage of sales was up by a big 3.75-percentage points shows the extent of pressure brought on margins.

The profit (operating and before exceptional items and tax) growth registered by the company during the fourth quarter is the lowest since the historic turnaround of 2001-02.

So, are we beginning to witness a trend reversal after the hectic growth of the last three years? It would be premature to assume this based on the numbers of a single quarter.

Strong balance-sheet

Tata Motors has an exceptionally sound balance-sheet that can withstand temporary blips caused by factors such as rising raw material costs. It is a dominant player in the commercial vehicles market and is among the top three in passenger cars.

Importantly, its sales is growing at a faster rate than the industry itself in both commercial vehicles and passenger cars.

The company did exceptionally well in shaving off a whopping Rs 570 crore from its cost structure in 2004-05, which balanced the higher outgo for raw materials. It also repaid about Rs 400 crore of debt and was still left with an investible surplus of Rs 2,590 crore.

After accounting for the outstanding debt of Rs 2,500 crore as on March 31, 2005, the company is left with a net cash surplus of Rs 90 crore.

Rising market influence

On the business side, Tata Motors has increased its market share in almost all the relevant segments of commercial vehicles with an overall 25 per cent increase in sales during the year.

Consequently, the market share rose to 59.7 per cent from 58.5 per cent in 2003-04. Traditionally, in a booming market, Tata Motors has always done better than competition.Similarly, the company did well in the passenger cars (including utility vehicles) business too with sales growing by 28 per cent.

While it maintained its market share in the compact cars segment at 21 per cent, it made strong inroads into the lower end of the mid-size segment with the Indigo growing its market share to 31 per cent from 26 per cent the previous year. The Indigo Marina, launched during the year, succeeded in breathing life into the dormant estate cars segment.

Blips on the radar

While the above factors are reassuring, investors would do well to keep an eye on the broad economic parameters and also the trends in the commercial vehicles industry.

After more than three years of booming growth, the commercial vehicles industry is now due for a cyclical slowdown; whether it happens in the coming two-three quarters or in the next financial year remains to be seen.

A lot would depend on the monsoon and its intensity and spread. There is also the spectre of a rise in interest rates, which could set back the commercial vehicles sector.

Competition is set to further intensify in the passenger cars business with the launch of a couple of new models by established competitors.

What should lend a measure of confidence is the increasing contribution to revenues from the international businesses of the company, including exports. Though Tata Daewoo, the Korean subsidiary, saw a fall in its profit before tax to Rs 29 crore from Rs 54 crore in 2003-04, the company managed to increase its market share. South Africa is fast turning out to be a promising market for both commercial vehicles and cars.

The recent acquisition of a 21-per cent stake in the equity of a Spanish bus manufacturer, Hispano Carrocera, is likely to give Tata Motors access to technology in the bus segment, apart from the rights to use the brand name.

Also adding confidence is the stated cost-reduction programme of Rs 1,000 crore in the next three years. The track record of Tata Motors in this respect only adds to the comfort level. Besides, the company is also working on new product launches in both commercial vehicles and cars, including a successor platform to the Indica and a low-cost mass car. It is also set to commence the introduction of models from the Daewoo stable from the end of this calendar.

Investors can stay with the stock for now. However, it may be prudent to keep a close eye on the trends in the economy and the commercial vehicles industry.

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