Stock Review: Tata Motors

While JLR's performance was again impressive, higher costs impacted margins in the domestic market Tata Motors' consolidated September quarter results were above expectations, with revenues jumping 36 per cent year-on-year (y-o-y) to

`28,782 crore, while the net profit spurted to `2,223 crore from `22 crore in the period a year before. The jump in profits was largely due to Jaguar Land Rover's (JLR's) performance, which recorded its fourth consecutive quarter of net profit.

The UK-based subsidiary saw a 24 per cent y-o-y jump in volumes on strong showing in the Chinese and Russian markets, and good response to the new Jaguar XJ. Realisations at JLR were up seven per cent, due to an improved product and regional mix and a drop in discounts. Operating leverage and lower fixed cost helped JLR grow its Ebitda (earnings before interest, taxes, depreciation and amortisation) margins by 110 baiss points, quarter-onquarter (q-o-q), to 16.6 per cent. The key concern for the company continues to be weak European sales outlook.

While JLR's performance helped improve the UK-based subsidiary's margins, Indian operations suffered a margin dip (110 bps sequentially, to 9.7 per cent) due to higher raw material costs, higher staff costs and other expenditure. The management believes the price increases and cost reduction efforts should help improve margins. The company affected a 0.5-3.5 per cent rise in commercial vehicles (CVs) in October and `9,000 on the Nano this month. Analysts say although the freight rates are healthy and demand strong, a rise in interest rates could cause drop in CV volumes. Higher raw material costs could squeeze margins further.

On the revenues front, the standalone business registered a growth of 41.5 per cent to `11,450 crore on the back of 31 per cent jump in volumes. While commercial vehicle sales grew 28 per cent, passenger car volumes were up 37.5 per cent on the back of higher Nano, Manza and Vista sales. The growth continued in October with sales volumes up by 21 per cent y-o-y. The company is banking on higher sales of the newly launched crossover vehicle, Aria, and the refreshed Safari to be launched next year. In the commercial vehicle segment, the company plans to launch BS-III range across products and new variants for its light commercial vehicle segment.

Post the qualified institutional placement (QIP) in October, the company has been able to bring down its debt to equity ratio to 1.16 times from 1.73 times at the end of the September quarter. With cash at roughly $2 billion at the end of September, Tata Motors should be able to meet its capex requirements, especially at JLR ($800 million-$1 billion annually). At Friday's closing price of `1,245.55, the stock trades at eight times its consolidated 2011-12 earnings, and could fetch 14 per cent returns over the next year, analysts say.