Operating margins remain under pressure in a tough operating environment.
A fairly good increase in the number of commercial vehicles sold — volumes up 16 per cent —- in the June 2008 quarter helped Tata Motors post a satisfactory 14.4 per cent rise in sales to Rs 6,928 crore. However, the higher cost of raw materials pushed down the operating profit margin by 130 basis points to 7.7 per cent. Consequently, the operating profit fell marginally to Rs 531 crore. While the operating environment for commercial vehicles remains tough, the Rs 28,531 crore Tata Motors was able to push through a price hike at the start of the June quarter.
That helped cushion a part of the increase in raw material expenses. Moreover, brisk business in light commercial vehicles, where volumes grew nearly 25 per cent, helped boost the topline. The management says demand for CVs has not contracted significantly and believes that the slew of new launches this year should give a fillip to sales.
However, it feels the heavy vehicles segment may be impacted because of rising interest rates, which will drive up the cost for fleet operators. Passenger cars didn’t sell too well during the June quarter, though new models of the Indica, Indigo and the Nano are expected in the current year. Meanwhile, the lack of new models, in a market in which Maruti Suzuki and Hyundai Motor have been aggressive, has hurt Tata Motors.
While the sale of a 26 per cent stake in the auto parts subsidiary TACO, will fetch Tata Motors some money, the company plans to raise close to Rs 10,100 crore through rights and overseas issues, which could result in a fairly large dilution of the equity of at least 42-45 per cent.
Tata Motors is expected to end FY09 with consolidated revenues in the region of Rs 32,800 crore and a net profit of close to Rs 1600 crore. In other words, the net profit could remain flat in the current year compared with Rs 1,635 crore in FY08.
At the current price of Rs 416, the stock trades at just under 11 times estimated FY09 earnings and is not expensive. However, uncertainty relating to the fund raising plans, in a weak market, could leave the stock languishing for some time.
