Stock Reivew: TATA MOTORS

Tata Motors grappled with rising costs at its key European operations, namely Jaguar Land Rover (JLR) in the June 11 quarter. As a result, the company's core consolidated operating profit margin (esxcluding amount capitalised, depreciation and amortisation) declined 240 basis points y-o-y to 7.6% in the first quarter of FY12, despite net sales that rose 24.1% in the quarter under review.

At its JLR operations, which accounted for nearly 59% of its total consolidated sales in the first quarter of FY12, the company has highlighted the adverse impact resulting from cost pressures and foreign exchange rates. No doubt, its JLR realisations improved on a y-o-y basis in the June 12 quarter, but there was also a surge in various key commodity inputs in the quarter under review.
As a result, Tata Motors grappled with weaker operating margins in its JLR operations on a y-o-y basis in the quarter under review. In contrast, during FY11, the company benefited from a sharp turnaround in the performance of its JLR operations and the consequent strong improvement in its consolidated operating margins on a y-o-y basis.

Apart from that, the growth in JLR volumes during the June 11 quarter was 4.9% y-o-y, compared to 25.6% y-o-y reported during FY 11. The company's consolidated net profit was also flat on a y-o-y basis in the June 11 quarter, and that was, thanks partly, to a jump in its amount capitalised.

The growth in its net sales was broadly higher than analysts' estimates, but its operating margins and net profit were lower than analyst estimates. The stock was broadly flat at . 845.6 on Thursday, and it is hovering above its 52-week low reached recently.

Meanwhile, in its smaller standalone result, which includes Tata Motors' domestic operations and export of vehicles, it had also grappled with a fall in its operating margins. Also, the impact of rising auto finance rates has impacted vehicle sales growth in June 11 quarter vis-a-vis FY11. Going forward, in its European operations, the operating environment is rather bleak, considering the current sovereign debt problems there. However, the company will shortly launch the Evoque model in Europe and consumer interest is understood to be rather strong. Apart from that, Tata Motors' continued expansion in higher growth markets like China is expected to remain important, and help deal with a rather difficult environment in Europe. Also, managing commodity input pressures will remain key going forward. In addition, in domestic markets, rising auto finance rates are a cause for concern.

Tata Motors trades at a consolidated P/E of 5.6 times on a trailing four-quarter basis and we are neutral on the stock.