Tata Motors: Cost pressures pull down margin

The price increase during the quarter was not enough to overcome the rising raw material costs.

A sequential increase of 4 per cent in sales volume helped Tata Motors post a 12.5-per cent increase in standalone sales revenues for the quarter ended December 2009 at Rs 8,979 crore. Realisations in the third quarter surged due to the price hikes affected by the company and the change in the model mix.

While sales moved up, operating profit margin (OPM), that was trending up till the September quarter, fell 56 bps on a sequential basis to 12.8 per cent due to higher input cost. The price increase during the quarter was not enough to overcome the rising raw material costs, which as a percentage of sales rose 300 bps to 68.5 per cent. To protect margins, Tata Motors increased prices on its CV portfolio (medium and heavy commercial vehicles) by a per cent, while prices of passenger vehicles were raised by Rs 1,500-Rs 3,500. While the company registered a net profit of Rs 400 crore during the quarter as against a loss in the year-ago period, adjusted net profit was down 6 per cent sequentially. The depreciation and interest costs were much higher than the year-ago period, but were nearly flat compared to the quarter ended September 2009.

A growth in volume can be triggered by pre-buying of commercial vehicles as new emission norms kick in from April 2010, suggest analysts. However, there could be some delays as there is a shortage of fuel needed for the new vehicles in some states.

On the passenger vehicle front, Tata Motors will depend on the Nano, the recently launched Indigo Manza and Sumo Grande MK-II to perk up sales. Management believes that the short-term challenges, that are likely to impact operations, are the hardening of interest rates, the withdrawal of stimulus and rising commodity prices.

Despite the drop in profits and margins, higher volume growth expected in the coming quarters and a likely improvement in Jaguar Land Rover performance seemed to have helped the stock gain 4 per cent to Rs 719 on Monday. It currently trades at 22x its FY11 consolidated earnings estimates.