Tata Motors: Losing drive

Higher volumes and sales fail to translate into better profitability at Tata Motors

Despite posting strong sales growth of 42.2 per cent y-o-y at Rs 7702.66 crore, Tata Motors disappointed the street on the margin front with the operating profit margin falling to 11. 9 per cent y-o-y, a drop of 60 basis points.

The stock lost 4 per cent in Monday's trading. Thus, even significantly higher volumes and sales do not appear to be translating into better profitability.

However, the company has gained market shares in H1 FY07: its commercial vehicle market share went up to 65.2 per cent from 58 per cent, while for cars its up at 16.3 per cent from 15.8 per cent. Given its ability to come up with winners like the Ace, it should be able to maintain market share.

The management, however, has indicated that margins will continue to be under pressure given the high input costs: in the September quarter, the proportion of raw materials to sales fell slightly to 67.6 per cent though both staff costs""up 80 basis points y-o-y"" and other expenditure ""-up 30 basis points y-o""y saw an increase.

Demand in the CV segment is expected to grow at around 15-20 per cent in the next few years though there could be a slight slowdown in the M&HCV segment where Tata Motors has a high market share.

Exports, however, should grow at around 12-13 per cent over the next few years and should contribute around 10.5-11 per cent by FY07 from 10.1 per cent at the end of FY06.

In the passenger cars, the tie-up with Fiat will give it access to diesel engines and help it compete with Maruti, which will be rolling out the diesel Swift early next year.

At the current price of Rs 852, the stock trades at 18 times estimated FY07 earnings and 16 times FY08 earnings and is reasonably valued.