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Tata Motors posts robust revenue, but have margins peaked?

Tata Motors posts robust revenue, but have margins peaked?
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First Published: Fri, May 27 2011. 12 47 AM IST
Updated: Fri, May 27 2011. 12 47 AM IST
Tata Motors Ltd’s shares rose by 2.5% on Thursday in the run-up to the company’s results. However, with surprises from its Jaguar Land Rover (JLR) business tapering off, the March quarter results were in line with estimates.
Consolidated net revenue for the quarter jumped 23% over the year-ago period. About two-thirds of this came from JLR, where new product launches continued to fuel sales as in the previous three quarters of fiscal 2011. Net revenue from domestic operations was lower at 19%.
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Price hikes across the board of 4-6%, along with robust growth in both the commercial vehicle and passenger car segments in the local market, translated into strong revenue, which in turn led to higher profit.
Consolidated operating profit grew by around 45% from a year ago. The growth was a reflection of the subdued performance of JLR in the March 2010 quarter, when the firm was just gathering steam post-restructuring.
But operating profit for the domestic entity grew marginally due to cost pressures. In fact, a section of analysts are also concerned about the flattish operating profit on the consolidated level, when compared with the preceding quarter.
The impact of rising material costs, which comprise almost three-fourths of revenue in the automotive business, was evident in lower operating margins compared with the preceding quarter. While consolidated margin was higher due to lower base effect, it was about 1.65 percentage points lower from the preceding quarter.
Tata Motors’ consistent effort to bring down debt translated into a net debt-to-equity ratio of 0.7, which led to lower interest cost. Consequently, net profit grew to Rs2,640 crore—about 19% higher from the year-ago period and 9% from the preceding quarter.
That said, the management has cautioned of a slowdown in the ensuing quarters, mainly in commercial vehicles, as higher interest rates could hurt industrial growth and slow sales. It also talked of “cautious optimism” on JLR sales.
Further, one wonders whether favourable currency movements that have buoyed JLR revenue and margins so far, will continue. An analyst points out that “average realization will come down when Evoque (new product) is launched as it is not in the luxury segment”.
Of course, JLR, whose profit comprises three-fourths of the total, will continue to drive both revenue and volumes. Higher overseas volumes would help the company on a consolidated basis, even if there are hiccups in the domestic commercial vehicle segment. However, cost pressures and competition could tell on profit margins.
Tata Motors announced a 1:5 stock split, which would improve liquidity. The current market price of Rs1,161 discounts the one-year forward earnings by around seven times, a valuation that could help sustain investor interest in the stock.
Graphic by Yogesh Kumar/Mint
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First Published: Fri, May 27 2011. 12 47 AM IST