Tata Motors: Margins crunched

In what was a really rough quarter, Tata Motor’s sales slipped an expected 35 per cent to Rs 4,713 crore. That the numbers for the December 2008 quarter would be weak was expected given that volumes in the three months were lower by about 32 per cent.

The extent of the erosion in the operating profit margin (OPM), however, came as a bit of a surprise -- obviously the high cost of raw materials continues to pinch --- they were up about 150 basis points q-o-q. That resulted in a sharp fall in profitability with the OPM at just 2 per cent against the September quarter’s around 8 per cent.

The management believes there’s some improvement in demand in the home market though a strong recovery looks like it’s some time away. Falling steel prices and the company’s efforts to rein in costs – targetted at Rs 1,000 crore over the next three years -- should help keep the company operationally in the black. The bottom line, though, could continue to be under pressure. Adding to the Street’s discomfort of weak sales is the fairly high equity ratio of 1.3.

The bigger worry is the Jaguar and Land Rover piece, which during the quarter, didn’t fare too well with volumes down 35 per cent y-o-y. That apart, it won’t be easy for Tata Motors to raise around $2 billion to repay the remaining portion of the $3 billion bridge loan that it took to acquire JLR, which it needs to do by the middle of 2009.