Tata Motors: Few drivers

The auto maker is on a rough road with demand for both CVs and cars sluggish.

With sales of commercial vehicles (CVs) having barely grown and passenger car volumes dipping in FY08, the street was not expecting much from India's biggest automobile company.

But the Rs 35,651 crore Tata Motors failed to live up to even the tempered expectations of the street, with the consolidated net profit remaining flat at Rs 2,168 crore, despite a fairly big increase in other income.

Revenues were up just over 10 per cent, but the operating profit margin (opm) was under pressure coming off slightly to 12.4 per cent.

The stand-alone numbers for the year were no better with revenues up less than 5 per cent, resulting in a fall in the opm of 150 basis points.

In a difficult operating environment, when the economy showed signs of slowing down, interest rates remained high and financing options were fewer, Tata Motors struggled to grow sales of CVs.

Moreover, the firm's mature passenger car portfolio""the India and Indigo ranges""failed to enthuse buyers as competitors Maruti Suzuki and Hyundai raced on with new models.

FY09 is expected to be moderately better for CVs though higher diesel prices in the wake of rising crude prices could upset the economics of freight operators and depress demand.

A new platform for CVs is on the cards and Tata Motors plans to launch a new range of products and some variants both in the CV and passenger car segments. The Nano, of course, is scheduled to roll off the assembly lines towards the end of the year.

While the new models may well find buyers giving Tata Motors some market share and reasonably good top line growth over the next couple of years, there are two major concerns.

The first is the Jaguar and Land Rover acquisition, which cost the company $2.3 billion but which may require additional infusions of capital and could take time to become profitable.

The other worry is the huge borrowing programme of Rs 9,000 crore that has been planned, of which Rs 7,000 crore is through a rights issue.

At the current price of Rs 635, the stock may seem inexpensive at 11 times FY09 estimated earnings but the proposed rights issue may keep the stock under pressure.

M&M: Tractors play spoilsport

Utility vehicle and tractor maker the Rs 11,503 crore Mahindra & Mahindra ( M & M) disappointed the street somewhat as the net profit for the March 2008 quarter stayed flat at Rs 1,103 crore, with higher interest costs on borrowings to fund the Punjab Tractors acquisition, eating into profits.

A bigger raw materials bill was also to blame, especially the higher prices of steel, as it dented operating profit margins by 60 basis points y-o-y to 10.9 per cent, despite a reasonably top line growth of 15.6 per cent.

Indeed, to M & M's credit, sales of UVs have been robust in a difficult operating environment""they were up a smart 16.4 per cent in FY 08, the Bolero doing particularly well to clock 50, 000 plus units.

However, tractor sales were somewhat sluggish, with the industry de-growing by 5 per cent. M&M, though, fared better than the competition with sales down just 4.7 per cent and managed to maintain market share in tractors at just under 30 per cent.

Together with Punjab Tractors, the company has a market share of 40 per cent plus. Weaker tractor sales together with higher input costs pushed down the standalone operating profit margin for FY08, which slipped 90 basis points to 11.7 per cent.

The environment remains challenging with interest rates unlikely to come off in a hurry, though April has been a good month for UVs with sales up 40 per cent. The M&M stock was flat at Rs 642 on Wednesday, though since the start of 2008 it has under-performed the market.

Going forward, the company will incur about Rs 9,000 crore over the next three years on capital expenditure. Moreover, the rising cost of inputs could keep operating margins under pressure. At the current price of Rs 642, the stock is inexpensive at 9 times FY09 earnings, because of the value of its many subsidiaries.