Tata Motors: Chugging along

Sluggish demand for trucks, high input costs drag the company's net sales in the September quarter.

The economy might still be in fine fettle, but the commercial vehicle industry remains in a trough. With the demand for trucks still sluggish, it's no surprise that India's largest automobile manufacturer, Tata Motors' net sales in the September 2007 quarter fell 1.5 per cent y-o-y to Rs 6,474 crore, adjusting for the one-time technology transfer income of Rs 170 crore, compared with the same period last year.

Costs showed no signs of easing and thus the operating profit margin dropped to 9.2 per cent, a sharp fall of 200 basis points, though there was a sequential increase of 20 basis points.

The standalone net profit before extraordinary items was down 28 per cent to Rs 310 crore, as it was impacted by higher depreciation.

The consolidated numbers were somewhat better with good performances from Tata Daewoo and Telcon. The sales were up 3.6 per cent to Rs 8,006 crore, though higher fixed costs drove down the operating margins and consequently the adjusted net profit.

The second half of the year could be better with the company having been able to reduce the inventory of finished goods for both CVs and passenger cars to one month.

While there have been some instances of payment delays in the vehicle financing business, the company has made adequate provisions for the same.

However, the commercial vehicle cycle is unlikely to turn before Q4 FY08. Sales of the Ace, an LCV, was fairly strong in the first half of FY08, averaging 6,500 units a month.

Tata Motors's passenger cars division has not fared well either, losing out to competition. There is little likelihood of the company gaining in market share till new models are rolled out. Earnings may not grow in the current year and consolidated margins are likely to be under pressure at least for another year.

The company is looking at unlocking value from some of its subsidiaries. At the current price of Rs 740, Tata Motors trades at 13.5 times estimated FY09 consolidated earnings. With neither the CV nor the passenger car businesses expected to gain momentum in the next six to eight months, the stock is likely to underperform.

Hindalco: Melting margins

Hindalco's performance in the September 2007 quarter was adversely affected by lower treatment and refining charges (TC/RC) on a y-o-y basis and lesser rupee realisations due to the depreciating dollar.

As a result, the company's operating profits declined 6.6 per cent y-o-y to Rs 921.7 crore in Q2 FY08, while net sales rose 7 per cent to Rs 4959.7 crore.

The operating profit margin also fell 270 basis points to 18.6 per cent. The operating profit margins of competing Nalco declined 1720 basis points y-o-y to 43.5 per cent in the September 2007 quarter.

Meanwhile, Hindalco sold primary metal (aluminium) worth 36,697 tonnes in Q2, a yearly growth of 4 per cent. While the average aluminium price on the LME in Q2 FY08 was $2,618 a tonne, a rise of 3.4 per cent y-o-y, the rupee gained nearly 11-12 per cent during the same period.

A small cushion for Hindalco's margins was provided by enhanced sales of higher value aluminium products such as rolled products and extrusions. Nevertheless, the segment profit of Hindalco's aluminium division declined 1.3 per cent y-o-y to Rs 662.1 crore in the last quarter.

The company highlighted that its TC/RC was lower by about 15 per cent on a y-o-y basis in the first half of FY08, with analysts estimating its TC/RC at 26-27 cents per pound in the first half of FY08. Segment profit of the copper division was more or less flat on a y-o-y basis.

An improvement in Hindalco's operating environment looks unlikely as the TC/RC margins have shown further weakness. Also, the surging rupee would continue to put pressure on Hindalco's overall operating profit margins.

With contributions from Shobhana Subramanian and Amriteshwar Mathur