Tata Motors: Still in a trough

Since the environment remains difficult, the company will continue to see sluggish sales.

The Street wasn’t expecting too much from India’s biggest auto player Tata Motors; it’s now clear that neither commercial vehicles nor passenger cars are finding too many takers in a credit-scarce and high interest rate environment. In that context, the numbers for the September 2008 quarter are not too disappointing.

The profit after tax has come off by about 15 per cent to around Rs 275 crore compared with the September 2007 quarter, after adjusting for some exceptional items in both periods and ignoring the foreign exchange gains and losses. On a sequential basis, compared with the June 2008 quarter, the operating margins are down about 100 basis points at 8 per cent, which again, was to be expected. After all sales in the June quarter had risen 14.4 per cent compared with 6 per cent in the September quarter.

The bad news is that things aren’t likely to get better in a hurry—in fact the management says it plans to scale back production in segments where it anticipates lower demand and may cut back on capital expenditure where new capacity creation is concerned. Even the price hikes taken in April ,July and October, cumulatively amounting to about 8.5 per cent, haven’t helped and while Tata Motors has done well to gain market share in commercial vehicles to about 62 per cent, it’s a reality that fleet operators aren’t buying new vehicles because there’s limited access to finance.

So, cutting down on capital expenditure may not be such a bad idea at a time when money is expensive and the company needs to raise money to pay for the acquisition of Jaguar and Land Rover. On the cost front, while spot prices of steel have softened it wouldn’t really benefit automakers in the near term because most of them have annual or half yearly contracts with steel suppliers.

Meanwhile, the Land Rover isn’t selling too well—volumes slipped during the quarter though the Jaguar did better posting an increase in volumes. Together, however, volumes came off by about 11 per cent during the quarter. At home the Indica Vista appears to have seen a good response from the market. That should help Tata Motors reverse the falling trend in car sales.