Tata Motors: Numbers on track

Tata Motors, too, has been hit by rising input costs

Tata Motors' results were largely in line with expectations "" revenues grew 28.4 per cent, slightly higher than the 25.9 per cent volume growth. Higher raw material cost dented profit margins, resulting in a much lower 18.6 per cent growth in operating profit.

Most auto companies have now reported lower margins in the December quarter because of escalating input costs. In Tata Motors' case, raw material cost was 625 basis points higher as a percentage of sales on a year-on-year basis.

Much of this was offset through a 350 basis points cut in other expenditure and a 160 basis points saving on staff cost.

As a result, operating margin fell just 110 basis points to 13.3 per cent. But part of the savings on "other expenditure" was owing to the impact of the rupee appreciation on the company's foreign loan repayments.

Profit before tax and exceptionals rose 25.5 per cent, thanks to a 48 per cent jump in other income and a 12.5 per cent cut in interest cost.

Last quarter's profit growth was much lower than the 42.2 per cent growth recorded in the first six months of the fiscal, but that was expected given the huge jump in raw material expenses.

The company has taken an average 2.5-3 per cent price hike for its commercial vehicles effective January 1, 2005, which should partially offset the rise in input costs.

On the revenue front, the outlook is bright for the March quarter, what with customers expected to advance purchases to avoid paying higher prices for new models (which will meet new emission norms) from April onward.

But beyond that, growth is expected to slow especially in the CV segment which has now recorded strong growth for three years. Keeping that in mind, it's heartening that the Tata Motors stock isn't too expensive at around 13 times estimated FY06 earnings.

Slowdown ahead?

The performance of the infrastructure sector in December, with growth at a mere 3.6 per cent, sticks out like a sore thumb amidst all those excellent quarterly results.

The growth rate is much less than the 7.8 per cent rise in the infrastructure index a year ago, in December 2003, and also lower than November 2004's growth of 5 per cent.

Recall that the growth in November 2004 was lower than growth a year ago, while growth in the first nine months of FY05, at 5.4 per cent, is lower than the 5.8 per cent recorded in the same period of FY04, and the implication is clear that growth in the core sector is slowing down.

In December, the sectors that slowed down were electricity, finished steel, crude petroleum, and, to a very minor extent, petroleum refinery products. Cement and coal have done well.

The good news is that in steel production, which saw a decline of -0.5 per cent, the base effect is squarely to blame, because steel production rose sharply in December 2003 to 3.3 million tonnes from 3.1 million tonnes in November.

That momentum was lost in the succeeding months, with production falling to 3.1 million tonnes in February 2004. That indicates the base effect would wear off in the next few months.

It's the same story for crude petroleum production, with output up hugely in December 2003 but falling back in February.

Nevertheless, unlike in steel, crude production has been at levels around last year's all through FY05.

But while it's true that the slowdown in growth is due to the base effect, that does reflect the fact that capacities are now being utilised to the full. It is only when new capacities come on stream, as in the case of Tata Steel this year, that growth will pick up again.

Indian Oil Corporation

The difficult operating environment for oil marketing companies (OMCs) was clearly reflected in HPCL's results, which reported a 70 per cent dip in its Q3FY05 profit. IOC's 46.4 per cent drop in net profit to Rs 1286.7 crore, therefore, didn't come as a big surprise.

In fact, the performance could have been worse but for a sharp 171 per cent rise in "other income" to Rs 654.4 crore, thanks to higher income from dividends and forex gains.

IOC's refining margins improved 16.95 per cent y-o-y to $5.45 per barrel, but it was hit by severe under-recoveries on kerosene and LPG sales in the last quarter-these have been estimated at Rs 2762 crore in Q3FY05, a rise of about four and half times y-o-y. Upstream players have borne a third of the subsidy losses last quarter.

However, in the previous fiscal, upstream companies had provided their share of the subsidy losses to oil marketing companies for the June and September quarters only in the December quarter, leading to a sharp rise in IOC's share of losses last quarter.

Further, because of higher crude prices, IOC's combined marketing margins for diesel and petrol were estimated at Rs 0.66 per litre in the last quarter versus Rs 1.2 per litre in the previous year.

As a result, IOC's operating profit (excluding other income) declined 67 per cent to Rs 1204.6 crore last quarter, with operating profit margin dropping by 705 basis points to just 3.28 per cent. Going forward, refining margins are anticipated to remain strong.

However, the direction of international crude prices will determine IOC's marketing margins on petrol and diesel, as well as the size of its subsidy losses.

With contributions from Mobis Philipose & Amriteshwar Mathur