It’s ironic that shares of Tata Motors Ltd soared on Monday, after the company reported its worst domestic sales and financial performance in years for the first half (H1) of the current fiscal that began in April. It reported over the weekend that vehicle sales fell by 20% over year-ago levels.
More importantly, sales of the key medium and heavy commercial vehicles nearly halved on a year-on-year basis. Its results for the September quarter, reported on Friday, were also disappointing.
One telling feature in Tata Motors’ results for H1 is the extremely low tax provision of Rs30 crore, even though profit before tax and exceptional items stood at Rs1,188 crore. One analyst with a domestic brokerage says cynically, “Much of the profit this year has come from selling long-term assets, gains from which are exempt from tax. There’s hardly any operational profit, which explains the low tax provision.”
That may be a bit too harsh, since profit before accounting for other income and exceptional items stood at Rs443 crore in H1, 28% lower than a year ago. Still, the low tax provision does raise some apprehension about actual profit being generated this year. Profit before tax margin has dropped to about 3% this year, compared with 5% a year ago. The results deteriorated last year itself, and it’s not that the company is faced with a high base effect.
As the company’s press release points out, “Unavailability of finance, coupled with high interest rates, is forcing customers to postpone purchases.” With the liquidity situation being tight in the recent past, banks hardly entertained loans for financing commercial vehicle sales, a segment that has been sidelined for well over a year now. It’s premature to assume that the central bank’s recent move to improve liquidity in the financial system will lead to easier availability of loans to commercial vehicle operators.
In any case, with economic activity also having slowed and freight rates coming off, underlying demand for goods carriers will be affected. As volumes fall, fixed costs will eat into the company’s profitability, evident from the results so far this year. It will be partly offset by a drop in variable costs as prices of steel and other commodities are on the way down.
The domestic slowdown is just one of the company’s problems. Sales of Jaguars and Land Rovers are also slowing, and it may be some time before the $2.3 billion (Rs11,270 crore) acquisition pays off for the company’s shareholders. The transaction was based on certain assumptions of fund-raising, which is at least partly affected, with the company revisiting its $600 million overseas issue of equity-linked instruments. Tata Motors is likely to end up being more leveraged than investors would like.
All of these concerns are reflected in the company’s shares, which now trade at about four times past earnings. But with no signs of immediate improvement in either domestic or international sales, valuations should remain cheap for some time.
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