Tata Motors: Stepping on gas

Tata Motors car sales rev up in the March quarter

Auto stocks have been out of favour in the past month, and Tata Motors is no exception - its share price has fallen 12.5 per cent in the past month, much more than the 5.4 per cent fall in the Nifty.

Sales of medium and heavy commercial vehicles (M&HCV) increased 16.15 per cent to 14,248 units in March, indicating that the meagre 5.5 per cent growth recorded in February may have been an aberration.

There's no doubt, however, that M&HCV sales have slowed. In the quarter ended March, their sales grew 13.75 per cent, much lower than the 30.6 per cent recorded in the nine month period ended December 2004.

And this was despite the fact that some buyers would have advanced purchases in February and March this year in order to avoid paying higher prices for Bharat Stage III compliant vehicles. For the whole year, the growth in total commercial vehicle sales was impressive at 25 per cent.

In the passenger car segment, sales growth was impressive at over 40 per cent in March. As a result, sales of Indica and Indigo have risen by over 32 per cent in the Jan-March quarter, slightly lower than the 34.5 per cent growth recorded in the nine months till December. Not only has Tata Motors beaten market leader Maruti hands down in percentage growth terms, it has also sold more cars than Maruti in the March quarter.

While the Tatas sold 10362 additional cars in the quarter, Maruti sold only 7052 incremental passenger cars. The situation was very different in the nine months till December, when the incremental units sold by Tata Motors was less than half the number sold by Maruti.

Overall sales growth in FY06 is expected to taper from the 27 per cent levels reported last fiscal, what with the signs of a slowdown in the M&HCV segment.

Earnings growth, however, is still estimated to be in the 20 per cent range, based on which the FY06 PE of around 11 times looks cheap. But there is the risk of earnings growth being lower if the company is not able to manage escalating input prices.

Bank term deposit growth

Growth in bank term deposits has been 13.4 per cent (after adjusting for IDBI becoming a bank) for the year to March 18, 2005, well below the 15.1 per cent growth notched up in the same period of the preceding year. Earlier, in the year to March 21, 2003, term deposits with banks rose by 17.2 per cent.

Contrast the growth in small savings. According to RBI data available till December 2004, small savings growth in the year to end-December 2004 was 23.3 per cent. That was higher than the growth in small savings in calendar 2003, which was 20.2 per cent.

A more dramatic picture is painted by the fact that, over the first nine months of FY 05, from April to December, small savings outstandings rose by Rs 61,461 crore, compared to a growth of Rs 61,944 crore for the whole of FY 04.

In other words, almost the entire growth in small savings for FY 04 was achieved in the first nine months of FY 05. That clearly suggests that growth in small savings has been accelerating.

Small savings were 30.8 per cent of time deposits as at end-December 2004, compared to 28.9 per cent as at end-March.

People are putting their money in small savings schemes, rather than in bank term deposits. Among small savings, post office deposits have been the most popular. In calendar year 2004, these deposits grew by 36.3 per cent.

Paper industry braced for a shake-up

The paper industry is ripe for a radical shake-up. Operating costs have risen sharply "" inputs like caustic soda and chlorine have risen about 40 per cent over the past year, while wood prices have risen approximately 30 per cent over the past 6-8 months.

In addition, paper companies have to install chemical recovery plants to comply with tighter environmental standards. No doubt paper prices have been recently hiked by Rs 750 - 1000 per tonne and prices in the high end segment are about 12 per cent higher on a y-o-y basis, but for smaller players the pressure on operating margin has become intense.

Recognising the expected consolidation in market share, larger players like Ballarpur Industries, JK Paper and Sirpur Paper Mills (SPM) are now expanding capacity.

SPM's rights issue, aggregating Rs 60.05 crore, is a case in point. The stock is being offered at about 19 times annualised FY 05 earnings and at an 18 per cent discount to the current market price. Peer group stocks like Ballarpur have a trailing P/E of 11 and for Orient Paper & Industries Ltd it is 15.

Resources raised would be used by SPM to expand its capacity from 83, 550 tonne per annum to 138, 300 tonne by September 2006. Higher input prices had resulted in the company's operating profit margins shrinking in the first nine months of FY 05, but, going forward, larger capacities would help it better manage operating costs.

Other players like Ballarpur are also looking to capitalise on the opportunities, by its plans to invest about Rs 1200 crore in expansion and modernisation of facilities.

This should result in a doubling of its paper capacity to by 2008 - 09. Clearly, the larger players are leveraging themselves for the eventual consolidation of market share in the paper industry.

With contributions from Mobis Philipose and Amriteshwar Mathur