Mumbai/Singapore: India’s biggest commercial vehicle maker, Tata Motors Ltd, reported an unexpected 19% increase in second-quarter profit as one-off gains masked waning demand.

Net income rose toRs527 crore in the three months to 30 September, from Rs442 crore a year earlier, the Mumbai company said in a statement on Wednesday. Nine analysts in a Bloomberg survey had a Rs353 crore medianestimate.

Sales rose 1% to Rs667 crore.

Rising interest rates eroded demand and operating profit as freight operators delayed purchases, anticipating India’s central bank would lower loan expenses. With the rates remaining unchanged on Tuesday, demand is unlikely to rebound, investors such as U.P. Bhatt said.

“The sector’s performance won’t be extraordinary," said Bhatt, who manages the equivalent of $203 million (Rs797.8 crore) of stocks at Canbank Investment Management Services Ltd. His fund owns 3,783 shares of Tata Motors. “Interest rates are expected to remain the same," he said in a telephone interview before the earnings were announced.

The Tata Motors share fell 1.3% to Rs757.70 on the Bombay Stock Exchange after rising as much as 4.9% earlier in the day. The shares, which declined to their lowest in more than a month, have fallen 16% this year, compared with a 44% rise in the benchmark Sensex.

The company’s operating margin dropped by about 100 basis points to 10% in the three months to 30 September from 11% a year earlier as raw material costs, including steel, rose.

A basis point is one-hundredth of a percentage point.

Costs for Tata Motors will continue be a “challenge", Ravi Kant, managing director, told reporters in Mumbai. “The last word on steel prices has not been said."

Tata Motors expects to maintain operating profit margin by raising prices on some products and improve production efficiency, chief financial officer C. Ramakrishnan said. It raised prices on commercial vehicles by more than 2% starting 1 October to offset the rise in cost, he said.

The maker of Indica and Indigo sedans, and Ace mini-trucks made a one-time profit of Rs199 crore. It earned Rs169 crore from technology transfer and Rs30.9 crore from a foreign-exchange gain after the appreciation of the rupee cut the repatriated value of its overseas debt.

The company has $1.05 billion worth of dollar loans, according to Bloomberg data. In the second quarter of 2006, the firm had made a currency exchange profit of Rs10.2 crore.

Tata Motors also plans to sell shares in some of its units in the fiscal year ending March, Kant said, without giving details. Bloomberg