The improvement in the domestic commercial vehicle sales should come as a relief for Tata Motors, which has been weighed down by losses and debt on account of Jaguar Land Rover (JLR), its $3 billion acquisition last year. India’s largest auto company, which reported a consolidated loss of Rs 329 crore for the June quarter largely on account of poor sales at JLR, saw its commercial vehicle sales post positive growth rates year-on-year and sequentially for the second month in a row. While analysts say that JLR sales are at near bottom and there should be a recovery on the back of incentive programmes by Western governments, for the near-term Tata Motors will increasingly look to its bread-and-butter commercial vehicle portfolio (including the high margin LCVs) to improve profitability and passenger vehicles (small car Nano) to deliver on the volumes front. CV turnaround?
Tata Motors recorded sales of nearly 50,000 vehicles in August 2009, up 14 per cent y-o-y. While the biggest gains came from higher sales of light commercial vehicles, the worst hit category, the medium and heavy commercial vehicles (M&HCV) have also seen encouraging growth. While July saw 6 per cent y-o-y growth, August sales were up 10 per cent y-o-y.
The average sales of the M&HCV vehicles for the first five months of 2009-10 was at 9,680 units. Driven by the Ace and its variants (Winger and Magic), the LCV segment sales surged 42 per cent y-o-y while they recorded a 5 per cent gain sequentially. To take advantage of the growing popularity of these vehicles the company is planning to launch another LCV this calendar year with a lower carrying capacity than the Ace.
The growth in commercial vehicle sales for the last couple of months is on account of higher demand and weak competition which has helped Tata Motors increase market share in the recent past. In the June quarter for example, it increased its M&HCV share by 400 bps to 66.7 per cent while the increase in LCV share was 900 bps to 68.5 per cent.
Aided by sales to state transport corporations under JNNURM, the company increased its market share in the bus segment to 56.4 per cent from 42.7 per cent in the same period.
The JLR questionIn contrast to the improving scenario in the Indian operations, the business situation in the key markets of the UK and the US (50 per cent of sales for JLR) continues to be challenging. For the June quarter, JLR reported a 35 per cent drop in wholesale volumes and a 52 per cent decline in retail volumes. Sequentially, however, wholesale volumes for the June quarter improved 10 per cent to 35,900 units while retail volumes moved up to 47,200 units for the same period which indicates that the company was able to clear the inventory at the retail level. While the signs are encouraging, the management and analysts believe that a recovery in the luxury car segment is only expected in 2010-11. Meanwhile, the company is focussing on reducing costs on the headcount (about 20 per cent reduction), marketing expenses, salaries, raw material and by shutting down offices. While the Rs 512 crore loss for JLR in the June quarter was primarily due to lower volumes, these steps will help reduce its losses gong ahead. The continuing investments in carbon dioxide reduction programme for Jaguar and new product development costs has meant that the Rs 2,500 crore line of credit from European Investment Bank will help it tide over working capital needs and R&D costs.
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E: Estimates
Tackling debt
Of the roughly Rs 33,850 crore debt Tata Motors has on its books as on June 30, over half is long-term debt. The company will need to repay about Rs 4,250 crore by December 2010. While the company has cash of Rs 4,350 crore and has been able to generate a cash flow of Rs 333 crore in June quarter for the consolidated entity, it will have to raise more funds for its capex programme (Rs 2,500 crore for Indian operations this fiscal), repay debt and finance working capital needs. With a debt to equity ratio of nearly 6, the company is saddled with debt and high interest costs. Interest paid for the June quarter at Rs 584 crore was as much as the Ebidta number.
The management has identified internal accruals, equity issue and divestments to fill the funding gap. As in the previous quarters, the company may look at an appropriate moment to divest its holdings of 1 crore Tata Steel shares, for example. At current prices, the sale will fetch it Rs 430 crore, which is not significant as compared to its overall debt burden.
The short-to-medium term appears to be a bumpy road ahead for Tata Motors and a change in its fortunes is dependent on the recovery in auto sales numbers for its two British brands—Jaguar and Land Rover. At Rs 508, the stock is trading 18 times its 2010-11 estimated earnings of Rs 28. Considering the uncertainties in the short term, look at investment at sharp declines but with a 2-3 year time-frame.
