Speed limit

POUND WISE

With interest rates likely to ease and a slew of new platforms and product launches next year, Tata Motors' sluggish sales trend could reverse.

The slowdown in commercial vehicle sales and its impact on earnings of Tata Motors has not gone unnoticed at Dalal Street.

The stock is down 8 per cent since September last year at a time when the BSE Auto Index has returned 7 per cent while the Sensex, which has been touching a new high every other day, a phenomenal 51 per cent.

Why is a company which dominates the commercial vehicles segment with a 64 per cent market share struggling to move into a higher sales trajectory this fiscal? More importantly, will this trend continue for the next two quarters as well?

Interest burden
Tata Motors' problem is the lacklustre sales in its bread-and-butter heavy and medium commercial vehicle (H&MCV) segment.

Sales of its trucks in the domestic markets were down 11 per cent for this fiscal so far, while those for September were down 7 per cent year-on-year. Of its other business segments, light commercial vehicles (Ace) and utility vehicles (Sumo, Safari) grew by 11 and 4 per cent y-o-y on a cumulative basis from April to September 2007, but passenger cars (Indica, Indigo) were down by 5 per cent.

While this performance has not been too encouraging, one reason is that the base last year was higher.

In 2006, three major festivals in October last year forced automakers to increase dealer level inventory, while this festive season they are spread out.

The key reason has been the upward movement of interest rates by 300 basis points in the last one year.

"The domestic market continues to be sluggish, due to the high interest rate regime, which continues to affect retails," says a Tata Motors spokesperson.

Analysts say that a 50-bps cut will not help solve the problem of Tata Motors' customers; it's going to need a 150-200 bps fall to increase the company's sales.

Rising costs
A rise in fuel costs this fiscal has compounded the problem further for the company as well as its customers--truckers and transport companies.

"The payback period for truckers has increased from 3.5 to 5.5 years due to higher cost of financing the vehicle as well operational expenses," says Deepak Jain, analyst, Anand Rathi Securities.

While breakeven period has increased, what is worse is the decline in resale values. With customers delaying purchases on expectations of a cut in interest rates, the company is likely to offer discounts in the festival season to boost sales.

The last two quarters are important for the company as they account for over 60 per cent of annual sales.

Though the company has increased its prices by 1.5 per cent thus far this year, it is unlikely to hike price in the second half.

According to an Anand Rathi report, truckers operating 9, 12 and 16-tonne vehicles are bleeding due to increase in interest and fuel costs.

Only those operating the 25- and 35-tonne capacities are making money. If banks which have reduced their exposure to two-wheelers start to cut their commercial vehicle loan portfolio it will have a major impact on Tata Motors' sales.

The silver lining is that freight rates on key routes--a key indicator of profitability of transport companies--are firm at present.

But analysts believe that this is due to a temporary shortage of vehicles on the back of delayed purchases and expect freight rates to come down. Besides these problems, Tata Motors also has to contend with rising raw material costs.

The steel effect
Record steel prices are likely to dent margins as the metal accounts for 45 per cent of Tata Motors' raw material costs.

"Though the company has a fixed priced contract for the procurement of steel from Tata Steel which will act as a hedging tool, it will not be completely immune to higher steel prices," says Vaishali Jajoo, analyst, Angel Broking.

The company is looking at cost cutting measures to mitigate this surge in raw material prices. 
 

SMALL CAR DREAMS
Product	Capacity Expansion (No of units)			Capex (Rs cr)
	FY05	FY06	FY07	FY08-10E	FY07-FY10
1 Lakh Car	0	0	0	350,000	5000
Compact car	204,400	219,000	225,000	300,000	-
UV	60,000	60,000	60,000	90,000	500
CV excl ACE	220,000	2,20,000	2,20,000	396,000	2500
ACE	0	30,000	70,000	200,000	-
Total Capacity	484,400	529,000	575,000	1,336,000	8000
Maintenance Rs 400 cr per year					1600
Total Capex					9600
Source: Anand Rathi Securities

New engines
While there is little to talk about in the near term, there could be a significant upswing in sales as the company readies to launch new platforms and products starting Q4 FY08 both from its plants and from its joint ventures.

The company has tie-ups with Thonburi of Thailand, Marcopolo of Brazil and Fiat for the manufacture of pick-up trucks, buses and passenger cars respectively.

Indica and Indigo will be the first off-the-block with new platforms from Fiat in the last quarter of Q4 FY08. This will be followed by a Sumo variant Phoenix, a global truck from the Daewoo stable, the Xenon pick-up truck and the much-awaited small car in FY09.

The near term sales trigger could be orders for about 7,000 low floor buses from Delhi's public transport operators. With Tata Motors and Ashok Leyland having 75 per cent of the bus market, a large chunk of those orders could fall into Tata Motors' kitty.

Analysts say that if regulatory action in Delhi, which calls for plying of low-floor buses, plays out in other parts of the country, it could open up a large market.

Valuation
The only bright spot for Tata Motors in the past couple of months has been the performance of Ace LCVs. The launch of passenger variants of Ace -- Winger and Magic -- should see it record growth of 12-15 per cent y-o-y in the next quarter. 
 

BUMP AHEAD
	Q1 FY08	FY07	FY08E
Sales	7,630	32,360	35,596
Operating profit	1,070	4,120	4,271.52
OPM (%)	14.02	12.70	12.00
Net profit	500	2,170	2,384.93
NPM (%)	6.55	6.71	6.70
EPS	12.90	56.43	61.95
Shares (cr)			38.5
Price			776
P/E			13

Analysts estimate third quarter growth to be flattish for M&HCVs with a rebound likely in the fourth quarter, while passenger cars are likely to show a single-digit growth in the next two fiscals.

Even though M&HCVs sales are likely to disappoint, realisations should move up by 5-7 per cent as its customers move from 16-tonne trucks (Rs 9.38 lakh) to 25-tonne trucks (Rs 11.37 lakh) in search of viable options.

"Even if unit sales are flattish, there will be higher realisations to the tune of Rs 1.5 lakh per truck," says Jain.

The Tata Motors stock, which took a beating following its move to buy out Jaguar and Land Rover from Ford, has recovered from its 52-week low of Rs 616 on August 22 to Rs 776 now.

In the sum-of-parts valuation, analysts estimate the core business value between Rs 710 and Rs 833 per share, and its investments and subsidiaries in the Rs 128-240 band. This gives the value of the company between Rs 838 and Rs 1073. The stock discounts its estimated FY08 earnings of Rs 54 by 14 times.