Stock Review: TATA MOTORS

THE stock of Tata Motors hit its all-time high of 1,350 during the intra-day trading on Wednesday, in response to the company's robust second-quarter performance. This, once again, highlights the strong performance of the company's overseas operations, including those of Jaguar and Land Rover (JLR).

   A major highlight of its performance was the fact that with business growth, profitability also improved. The company's consolidated operating margin rose by 770 basis points (bps) to 9.5% (excluding amount capitalised and other non-core items) compared with a year earlier. Net sales grew by 36.5% to 28,782 crore in the quarter under review. JLR accounts for nearly 56.2% of its consolidated quarterly turnover.

   The growth momentum for JLR operations came not only from a 21% rise in volumes for its models during the quarter, but also from the improved realisation per vehicle and a better product mix. In addition, a weaker pound against the dollar helped realisations and operating margins. This enabled the company to deal effectively with the gruelling problem of rising metal and allied costs. With this, Tata Motor's consolidated net profit has reached a normalised proportion to sales. It surged nearly 100 times to 2,223 crore in the quarter, given a lowbase effect of the previous year.

   However, the picture is not that promising on the home front. Tata Motors' India business is facing cost pressure amidst the rising interest rate regime. The company had hiked prices during the first half of the financial year, but that could not protect its domestic margins, which shrank by 310 bps to 7.7%. The company hiked prices again in October. In addition, the domestic auto finance rates are firming up and that may impact sales volume growth over the next few quarters. Currency fluctuations would also play an important role given the increasing proportion of the company's overseas activities. This, in turn, could cause fluctuations in its consolidated margins. On a positive note, demand conditions in the key markets of JLR, like Russia, China and North America, are expected to continue in the short term, given the pick-up in economic activities in these countries.

   The stock of Tata Motors trades at a P/E of nearly 10.7 times its trailing 12-month consolidated earnings. This seems to fully reflect the market's expectations about the company's future growth.