Tata Motors: Full throttle

Tata Motors beats expectations, even after adjusting Tata Finance numbers

The Tata Motors stock jumped over 3 per cent from around Rs 475 to Rs 490 soon after the company announced an 8.6 per cent increase in revenues and a 19 per cent jump in profit before exceptionals and tax.

When the markets realised that the numbers weren't really comparable, since they included the performance of Tata Finance last quarter, the stock gave up most of those gains and settled at Rs 480.

Tata Motors has said that Tata Finance accounted for about 1-1.25 per cent of its topline last quarter, which means that revenue growth would be lower at about 7.2-7.5 per cent.

But the larger impact is on the bottomline, since the financing company's profit of Rs 24 crore accounted for nearly 7 per cent of the total profit at the pre-tax level.

Adjusted for this, growth in pre-tax profit is much lower at 10.8 per cent, and instead of an 80 basis points improvement in the pre-tax profit margin, one is left with a 30 basis points improvement.

Also, adjusted for Tata Finance's contribution to the top line, it turns out that raw material expenses as a percentage of sales were up, and not down.

Nevertheless, these expenses were higher by only about 20 basis points, which is commendable given the pressure on input costs and an adverse shift in the sales mix, favouring exports and cars.

Actually, the fact that the company has reported a growth in profit even after adjusting for the Tata Finance numbers is a rather pleasant surprise.

Analysts had estimated that profits would fall because of the 6.6 per cent drop in the company's domestic commercial vehicle (CV) sales last quarter.

While a check on costs certainly helped, higher other income and a sharp 72 per cent drop in the project development cost written-off also helped.

Importantly, even if there weren't vendor problems, Tata Motors' CV sales would have grown by 1-3 per cent last quarter, according to the company.

The growth in passenger vehicles was just 1 per cent last quarter, mainly because of the entry of new models in the market. Growth, however, should be better going forward what with the pick up in road construction activity after a hiatus in the past 8-10 months.

Tata Motors gets a valuation of about 13 times estimated FTY06 earnings, which is far from demanding, especially in relation to the rest of the market.

What's more, the contribution of the core commercial vehicles has dropped to about 40 per cent of revenues, which is important since the rest of the business is not affected much by cyclical factors.

Also, exports already account for 17 per cent of consolidated revenues, signalling that the company is well diversified even on that front.

IOC: crude jolt

Hit by huge under-recoveries, IOC reported a loss of Rs 54.23 crore for the June quarter compared with a profit of Rs 1472.1 crore in the same period last year.

In fact, the performance could have been worse but for a sharp 63.5 per cent rise in other income to Rs 211.47 crore, thanks to higher treasury income.

Gross refining margins (GRM) of the company fell to $6.16 per barrel last quarter, compared with $6.87 per barrel in the last year's Q1, with the drop GRM being attributed to the recent tariff cuts.

Under-recoveries for kerosene and LPG sales amounted to about Rs 1,832 crore against Rs 1,295 crore a year ago.

Also, under-recoveries on motor spirit and high speed diesel rose about 177 per cent to Rs 1,362 crore.

The surge in under-recoveries led to operating profit shrinking 82.5 per cent to Rs 466.08 crore last quarter and operating profit margin fell sharply to 1.2 per cent.

Going forward, unless the government raises retail prices of petroleum products in tune with international price trends, a recovery in IOC's profits appears unlikely.

ITC: keeping the faith

ITC's numbers for the quarter ended June 2005 were in line with expectations, with revenues growing by a handsome 24.7 per cent to Rs 2266.88 crore.

Growth was driven by the hotels, paper and agri businesses. Operating profit growth was lower at 16.6 per cent, but could have been lower if not for better margins in the hotels and cigarettes business.

High raw materials cost dented operating profit margin, which slipped 260 basis points. This was mainly on account of agri-business which saw a fall in margins as did the paper segment.

More importantly, the low-margin agri business jumped to nearly 20 per cent gross sales, compared with a much lower 14 per cent in the year-ago quarter, which caused overall margins to fall.

But that apart, the performance from the hotels segment has been impressive with the PBT up a stunning 342 per cent and the rise in the margin 2600 basis points.

The hotel industry has been booming for the past year and the company has done well to make the most of it.

The core cigarettes business reported a 12 per cent growth in revenues. One would estimate that this is the result of a more or less equal contribution from volumes and prices, since the company had taken a price increase soon after the budget.

That the non-cigarette lines are doing well is good news even though it might be a while before these segments start contributing meaningfully to the bottomline.

In the last quarter, they have contributed 35 per cent to gross sales, but just 15.5 per cent to total segment profit.

For the company as a whole the net profit was boosted by higher other income and lower interest paid out.

The stock, which has had a strong run, thanks to the settlement of the excise case, announcement of a bonus and stock-split and a good dividend payout, closed marginally lower in Friday's trade to the Rs 1680 level, or around 18 times estimated FY06 earnings.

With contributions from Mobis Philipose, Amriteshwar Mathur and Shobhana Subramanian