During the March quarter, the total number of vehicles sold by Tata Motors Ltd increased by 16% over the corresponding quarter of 2006. Net sales revenue for the stand-alone company rose by 20% and operating profits went up 8%. The deceleration in growth is clear: in the December quarter, vehicles sold increased by 27.5%, net sales rose 37% and operating profits went up 53% year-on-year. The only reason year-on-year growth in profit before tax and exceptional items was higher in the March quarter was because of a foreign exchange gain of Rs60 crore.
The squeeze in margins continued, with operating profit margins dropping 200 basis points from 13.7% in the December quarter.
But these issues are well-known and there were no surprises in the results, except, perhaps, in the extent of margin compression. For April, the number of vehicles sold went up by 11% year-on-year, but while more light commercial vehicles and passenger cars were sold, the number of heavy commercial vehicles sold was lower than in April 2006.
Analysts said the ban on overloading of trucks had the maximum impact in the first half of FY 2007 and the base effect will result in lower growth in heavy vehicles this year. Competition from new diesel passenger cars is also expected to take its toll.
The management acknowledged that growth is going to slow, but they aim to maintain market share. On margins, too, the management said there was still scope for a further rise in steel prices. Margins will also be under pressure from discounts.
So where’s the upside? The trigger could come, not from the core business, but from the management’s plan to unlock value from subsidiaries this year.
The big question about Bajaj Auto Ltd is: why did the management take so long to disclose to its shareholders that Allianz had call options at a nominal price on hiking its stakes substantially in the insurance companies?
The management said they’ve revealed the details of the call option now because analysts have been putting a “substantial and material” valuation on the insurance business. Well, they’ve been doing that for years. The point is, there is a material clause in the agreement between Bajaj Auto and Allianz that had a substantial bearing on the interests of Bajaj Auto shareholders and yet this was not made known to them.
The insurance dilution threat will now hang over the Bajaj Auto stock.
As for the demerger, the market had already priced that in. There’s actually a negative surprise there, as a clean break between the auto and finance businesses would have been preferable to the complicated holding-company structure. Investors will be concerned because the market usually gives a lower valuation to holding companies.
The March quarter results were better than expected, thanks mainly to higher “other income”. Motorcycle sales in April have been dismal, but the management said that’s because inventory levels at the dealers are being cleared.
Volumes may pick up later, aided by new launches in the third quarter. Excise benefits from the Uttarakhand plant could buoy margins. But investors may prefer not to be in a business that is seeing no volume growth and fierce competition, especially now that the upside from the insurance segment has also been eroded.