Mumbai: Vehicle maker Tata Motors Ltd’s quarterly net profit from domestic operations lagged estimates despite a surge in sales, signalling rising raw material costs are beginning to take a toll on margins.

Climbing commodity prices over the past few months on the back of a world economic recovery have worried automobile companies that are emerging from a sharp slowdown.

Analysts said Tata Motors, whose products range from the premium Jaguar and Land Rover brands to the cheapest Nano car, was probably better placed to ride out the storm because of improving demand for its trucks.

“Increases in input costs have been there, but the impact can be offset by a company like Tata Motors on higher demand for its trucks," said Suraj Saraogi, managing director of Keynote Capital. “New demand is coming in for trucks from smaller towns and this should be able to ride out any adverse impact from higher costs."

Consumer push: Analysts say Tata Motors is better placed to ride out the adverse impact of high costs because of improving demand.Ramesh Pathania

“We are watching the situation of the rise in commodity prices," he said. “If margins continue to be under pressure we would take pricing action as appropriate."

Higher raw material costs lowered operating profit to 12.8% in the December quarter from 13.36% in the three months to September, the company said.

Carmaker Maruti Suzuki India Ltd, leading utility vehicle maker Mahindra and Mahindra Ltd and bike maker Hero Honda Motors Ltd had earlier said pressure on margins could rise due to an increase in commodity prices such as aluminium, lead and copper.

Ramakrishnan also cautioned that a rise in interest rates and a possible withdrawal of stimulus support would impact sales in coming quarters.

India’s central bank surprised markets by raising banks’ cash reserve requirements by more than expected on Friday and warned of mounting inflation, setting the stage for increasing interest rates in the coming months.

Shares of Tata Motors, which has market value of $8 billion (Rs37,120 crore), fell 2.9% to Rs694.35 ahead of its results even as the Sensex rose 0.3%.

The company’s debt at the end of December was Rs20,000 crore ($4.3 billion).

Tata Motors reported a net profit of Rs400 crore from its Indian operations in the quarter to December, compared with a loss of Rs263 crore a year earlier, when an economic slowdown had hit sales.

Revenues surged 89% to Rs8,980 crore as sales of its cars, utility vehicles and trucks surged on customer demand and easy availability of credit.

A Reuters poll of 13 brokerages forecast net profit of Rs442 crore on net sales of Rs8,346 crore.

During the quarter, the company sold 159,139 vehicles, up 68% from a year ago.

Sales in India, one of the world’s fastest growing markets, have been boosted by a better economic climate and government stimulus packages that reduced factory-gate duties on vehicles.

Vehicles sales in the country rose an annual 22% in the first nine months of 2009-10, and the forecast for next year is in the range of 12-13%.

The company said it has started trial runs of its ultra-cheap Nano at its new plant in Sanand in Gujarat, and is on track to start production by the end of March.

The company has already delivered more than 17,000 Nanos since it began delivery in July last year.

Tata Motors shares rose 34% in the December quarter, outperforming a 2% rise in the Sensex. Its shares rose nearly five times in 2009 while that of Maruti Suzuki trebled.