Good volume growth for Tata Motors

Good volume growth for Tata Motors

Tata Motors Ltd reported strong growth in the commercial vehicles business for December, despite the recent transition to Bharat Stage III norms. Sales had been strong in the run-up to the deadline of October 2010 for the new emission norms. There were concerns that growth in truck sales would be subdued in the subsequent months.

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But the company reported 14% year-on-year growth in domestic sales of medium and heavy commercial vehicles, on the back of 18% growth in November. Sales grew by an impressive 18% on a month-on-month basis. Sales in December typically aren’t the strongest owing to the year-end factor, with buyers preferring to wait until the new year to make purchases. Despite this, sales growth has been strong. Even sales of light commercial vehicles grew at an impressive rate of 35% year-on-year and 21% month-on-month.

The commercial vehicles segment enjoys better margins compared with the passenger vehicles segment, and the high growth of this business augurs well for the company. The company’s domestic business will be further helped by the company’s decision to raise prices of various products to offset rising material costs.

Importantly, the passenger vehicle business, which reported a poor performance in November, reported strong 34% growth in volumes last month. This was solely on account of a rebound in the sales of the Nano, Tata Motors’ small car billed as the world’s cheapest. In November, the company sold only around 500 units of the small car owing to an inventory build-up with dealers. But last month, it sold 5,784 units of the Nano—which represents 60% year-on-year growth. Note that the Nano is expected to have a break-even point of 12,500 units per month. Cumulative sales of the Indica and Indigo continue to hover around the 11,000-12,000 mark, and there are no signs yet of a revival in their sales volumes.

According to a Citigroup Inc. report from early December, Tata Motors is estimated to have a capacity utilization of less than 70% in the Indica+Indigo segment, which is higher than break-even levels. But there would be a high upside from operating leverage if volumes increase from current levels.

Tata Motors also stated that sales of Jaguar and Land Rover continued their upward trend. Overall, therefore, the company continues to enjoy good volume growth, justifying to some extent the sharp rise in its shares. The company’s shares have risen by nearly 10 times from its lows in early 2009, while the broader markets have risen by around 2.4 times. The only concern at this point seems to be that the company’s shares may fall at a much higher rate as well if the markets correct.

Graphic by Ahmed Raza Khan/Mint