Tata Motors: Losing steam

Tata Motors' profit growth is flat after adjusting for the Tata Finance merger

Tata Motors' revenue growth of 15 per cent in the September quarter is much higher than the 8.6 per cent growth it managed in the June quarter. But importantly, the company's main competitor in the commercial vehicle (CV) space, Ashok Leyland grew revenues by 36.7 per cent last quarter.

What's more, Tata Motors' profit before exceptionals and tax grew just 6.3 per cent last quarter, much lower than Ashok Leyland's profit growth of 58.9 per cent.

Tata Motors' CV business was hit in the first half of this fiscal because of supply constraints for some of its components as well as delays relating to the certification of models that comply with new emission norms.

According to the company, the supply related problems will soon be fully resolved, and growth should return to levels seen last year.

According to the company, Tata Finance accounts for about 10 per cent overall operating profit. This has come as a negative surprise since profit growth in the core business is flat. First, adjusted for the vehicle financing business, growth in revenues is lower at 11.9 per cent.

On the same lines, which is a like-to-like comparison with last year's results, operating profit is down by 0.3 per cent last quarter. According to reported numbers, operating profit has risen 10.8 per cent, but this doesn't give a correct picture since Tata Finance's numbers were not part of last year's results.

In fact, adjusted for Tata Finance numbers, operating margin are down 140 basis points in the September quarter. Even for the six month period ended September, operating profit is flat at last year's levels of Rs 950 crore, adjusted for Tata Finance's contribution to overall profit.

The fact that profit growth in the existing has been flat so far this fiscal, and not 12 per cent as reported by the company, could affect the stock.

IPCL

The key takeway from IPCL's September quarter results is that prices of petrochemical products like polyethylene have recovered in the September quarter, after the sharp drop witnessed in May to June 2005. On a year-on-year basis, however, prices were flat.

On the negative side, costs of inputs like naphtha have continued to rise. As a result, IPCL has seen its operating profit margin drop by about 84 basis points on a q-o-q basis. On a y-o-y basis, however, margins were flat at 20.4 per cent.

The company's earnings before tax and extra - ordinary items grew 28.7 per cent to Rs 305 crore in the last quarter, faster than the 12.4 per cent growth in its net turnover.

Profit growth has been aided by a drop in other expenditure, which fell almost 8.5 per cent to Rs 576 crore in the last quarter. If one were to use IPCL's results as a benchmark, it does indicate that RIL's petrochemical segment could also report a flat trend in profit growth on a y-o-y basis.

ABB India

ABB India's September quarter results show that the buoyancy in the capex cycle continues. ABB's operating profit doubled to Rs 81.48 crore in the September quarter. Although revenues increased about 25 per cent, growth in profit was much higher thanks to cost savings.

The company's operating margin grew 430 basis points to 11.46 per cent last quarter. Margins increased on a sequential basis, too, by 230 basis points.

The ABB stock rose just 1.14 per cent on Wednesday, in line with the rise in the Nifty, indicating that markets weren't excited about the results. That's easy to understand. The stock was already trading at a steep valuation of 36 times estimated CY05 earnings, pricing in high growth expectations.

Coming back to the results, almost the entire cost saving came from a cut in the consumption of materials. As a percentage of sales, this fell by 480 basis points to 69.58 per cent.

Even on a sequential basis, the proportion of raw material expenses to net sales declined 277 basis points. Prices of the company's key input, steel, have cooled lately, which has helped ABB better manage its operating costs.

Growth in profit before tax and exceptionals, however, was lower at 63.6 per cent, largely due to a 42.7 per cent drop in other income last quarter.

Meanwhile, increased orders from power utilities and strong demand from the industrial sector for automated solutions helped the company's order intake expand 40 per cent y-o-y to Rs 916 crore.

This simply means that revenue growth would be strong even going forward. The company's outstanding order backlog as on September 2005 is 48.8 per cent higher at Rs 2075.2 crore.