Mumbai: Soaring metal and steel prices hit India’s largest auto maker Tata Motors Ltd hard in the quarter ended June, crimping net profits by 30% to Rs326.11 crore from the year-ago quarter.
The fall in profits, the sharpest in at least five years, despite a 14.4% year-on-year gain in sales to Rs6,928.44 crore (net of excise payouts to the government) came about as the cost of raw materials expanded by at least 25% over the three months. Raw materials account for the single largest expense for the company which makes cars, utility vehicles and trucks.
Tata Motors’ profits in the April-June quarter, the first of fiscal 2009, would have been lower but for a one-time income of Rs114 crore booked from the sale of 24% equity in auto parts unit, Tata AutoComp Systems Ltd to Tata Capital Ltd, an affiliate that is also part of the Tata group. This helped other, or financial, income nearly quadruple to Rs315.61 crore from Rs88.29 crore in the year-ago quarter.
Speed bump: Tata Motors’ managing director Ravi Kant. The fall in the firm’s profits for the first quarter is the sharpest in at least five years. Photograph: Ramesh Pathania/Mint
That gain, however, was weighed down by a Rs200 crore notional loss on foreign currency debt obligations translated into the rupee, a currency that lost 6.8% value in the June quarter. In the comparable quarter of fiscal 2008, this so-called marked-to-market entry added nearly Rs206 crore to Tata Motors’ income.
Tata Motors, part of the group which makes everything from salt to software, had reported net profits of Rs466.76 crore on net sales of Rs6,056.82 crore in the first quarter of 2007-08.
The latest Tata Motors results, released Wednesday evening, come at a time when high-cost debt—interest rates are at a seven-year high—is shrinking customer demand and making funding more expensive for the auto maker (it plans to raise $2.4 billion, or Rs10,200 crore, in five years). Sales of the firm’s Rs1 lakh car Nano are scheduled to begin next quarter.
The car is being made at Singur at West Bengal and a partial transcript of the Tata Motors press conference circulated by the company’s public relations firm had Tata Motors’ managing director Ravi Kant saying that “the situation is becoming bad.” The company’s small car factory at Singur has been dogged by controversy with several activist groups and political parties claiming that the West Bengal government forcibly acquired land for this from farmers. Kant added that, “ultimately the people of West Bengal have to decide whether they want to have industrialization in that state or not.”
The firm’s operating margin, a gauge of business profitability, fell to 7.7% from 9% a year earlier. Tata Motors expects margins to remain under pressure, chief financial officer C. Ramakrishnan said.
One analyst said the fall in profits was unexpected, especially since Tata Motors had hiked vehicle prices twice in the quarter gone by. “We were looking at some kind of relief (from rising raw material prices) on the margins coming from the pricing action they have taken on vehicles side,” said Mahatesh Sabrab, an auto analyst at Centrum Capital Ltd.
A Mint poll of five analysts tracking auto stocks had estimated Tata Motors to post a 18.6% decrease in profit after tax, primarily due to higher interest payments on loans to fund the purchase of Land Rover and Jaguar and foreign exchange losses.
Commenting on the business performance in the quarter gone by, Kant blamed “capacity constraints at the Pune facility”. Tata Motors plans to introduce “12-15 products in the current fiscal”, he added.
Other auto makers, too, have reported weaker profits in the June quarter. Last week, Maruti Suzuki India Ltd, which makes about half the cars sold in India, reported net profit for the quarter was 6.7% lower than the year-ago quarter. It reported profit of Rs465.8 crore in the quarter on sales of Rs5,436.5 crore. The revenue showed a 18.13% expansion.
Tata Motors, also India’s third biggest car maker after Maruti Suzuki and a local unit of South Korea’s Hyundai Motor Co., has manufacturing and distribution ventures with Fiat SpA. The Tata group firm, which recently bought Ford Motor Co.’s Jaguar and Land Rover brands for $2.3 billion, plans to raise about $1.7 billion in rights issues.
It has about a 60% share of India’s truck and bus market, and sold 127,361 vehicles in April-June, up 3% from a year earlier. Shares of Tata Motors fell 32% in the June quarter, while the auto sector sub-index of the Bombay Stock Exchange lost 21% and the bourse’s benchmark index declined 14% in the same period.
On Wednesday, shares of Tata Motors closed up 4.91% at Rs416.30 each. BSE’s benchmark Sensex index closed up 3.6% at 14,287.21.
Vipin Chandran works with Bloomberg and Rina Chandran with Reuters. Mint’s Shally Seth contributed to this story.