Tata Motors: Bumpy ride

Raw material costs affect Tata Motors' profitability

Tata Motors' operating profit margin dropped by 1.04 basis points y-o-y to 12.28 per cent in the Q3 FY06. Operating profit increased by just 7.22 per cent to Rs 623.06 crore, though net sales have gone up by 16.31 per cent.

Its performance has been dented by higher costs as well as other expenditure, which has gone up during last quarter owing to a forex loss of Rs 38.63 compared with a gain of Rs 62.08 crore in the December 2004 quarter. After removing the forex gain/loss, operating profit margins have actually improved by 1.14 per cent.

As a percentage of sales, Tata Motors' raw material costs rose by 237 basis points y-o-y to 71.18 per cent. Even in the September quarter, raw material costs had risen by 305 per cent y-o-y to 70.64 per cent.

Considering that steel prices have been low, the increase in raw material costs is a cause for worry. Operating profit was protected owing to an increase in stocks of Rs 184.69 crore compared with Rs 20.82 crore in Q3 FY05.

Sales of medium and heavy commercial vehicles (M&HCVs) fell by 1.8 per cent during the quarter, while light commercial vehicles have zipped ahead to 35 per cent.

The growth in LCV volumes has not translated into a similar growth in operating profit as margins in this segment are low. Passenger car and utility vehicle growth improved b11.07 per cent in Q3 FY06 compared with a 4.9 per cent drop in Q2 FY06.

The net profit increased by a huge 45.55 per cent, owing to profit on sale of shares amounting to Rs 164.3 crore in its subsidiary Telco Construction Equipment to Hitachi. At the current valuation of 20 times FY07 P/E, the market seems to expect the M&HCV segment to pick up soon.

Arvind : Top line blues

Despite the brouhaha about the growth prospects for textiles companies in the post-quota regime, their performances have been anything but encouraging.

Denim leader Arvind Mills posted 35 per cent decline in bottomline during the third quarter owing to slackening sales and substantial forex losses.

If it were not for lower raw material and power costs, profitability would have been lower. Raw material cost as a percentage to net sales declined by 540 basis points as Arvind is still riding on cotton procured at lower prices.

Similarly, power costs were down by 420 basis points to 8.1 per cent as the company has started using gas instead of high-cost naphtha.

Thanks to these two factors, operating margin improved by 270 basis points at 26 per cent and operating profit was up 7 per cent.

The key issue for Arvind remains top line growth. Revenues during the quarter declined 4 per cent on lower volume sales. Realisations were also hit owing to rising competition, particularly from China, Pakistan and Bangladesh.

Other textiles companies at home are also expanding capacities and indulging in undercutting prices adding to its woes. It may be difficult for Arvind to grow its bottom line unless it is able to counter competition and drive up sales as cost savings may diminish.

Fuel cost savings are almost over, while cotton prices have begun rising though the company claims that it has inventory to last till the July this year. The stock is richly priced at about 14 times FY06 EPS.

SAIL: flat steel

SAIL's 55.84 per cent y-o-y fall in operating profit to Rs 1372.55 crore in the December 2005 quarter was no surprise given the weakness in global steel prices. Operating profit margin fell a staggering 1806 basis points y-o-y to 21.66 per cent in Q3 FY06.

The market had more or less factored in the weaker performance from the company, with the SAIL stock gaining 9.1 per cent over the past three months compared with 20.9 per cent gain in the Sensex.

Competitor Tata Steel had a slightly better performance as its operating profit margin fall 433 basis points y-o-y to 37.78 per cent in the December 2005 quarter. SAIL's saleable steel production at 3.03 million tonne in Q3 FY06, was higher by 3 per cent on a y-o-y basis.

However, SAIL's realisations are estimated to have weakened by about 12 per cent on a y-o-y basis in the December 2005 quarter, say analysts. Apart from weaker realisations, the company had to also deal with a rising cost structure.

For instance, raw material costs, as a percentage of net sales, rose 796 basis points y-o-y to 36.66 per cent in the December 2005 quarter, mainly due to higher met coal prices.

Also, other expenditure of the company rose 30.54 per cent y-o-y to Rs 592.38 crore in the last quarter, which is attributed to increased repairs and maintenance costs.

An improvement in steel prices is not expected, given the rapid expansion of steel capacities in China. As a result, the SAIL stock gets a discounting of a mere four times estimated FY06 earnings.

With contributions from N Mahalakshmi and Amriteshwar Mathur