India’s largest truck maker Tata Motors Ltd reported a 20% drop in core operating profit for the second quarter in a row. Operating margin stood at 9.2% after adjusting for forex gains and a one-time income, nearly the same level as the June quarter. When the company had reported single-digit margins in the June quarter, it had come as a shock since margins have consistently been in double digits since the company returned to the black in 2002.

The worry for analysts is that the June quarter was no aberration (consensus estimates had assumed a margin of about 10%) and that the pressure on the company is more than anticipated. Revenues fell by 1.7%, in line with the overall drop in volumes. The reason profit fell more is simply because the share of the highly profitable medium and heavy commercial vehicles has been coming down in overall volumes.

The second-half period is normally better for auto companies, and Tata Motors’ margins may revert to double-digit levels. But as things stand, volume growth continues to be a challenge and core earnings from the automobile business for the year are expected to be lower compared with fiscal 2007.

The company’s subsidiaries continued to impress, growing operating profit cumulatively by more than 130%. As a result, consolidated operating profit rose by 7% last quarter, despite the 20% drop in profit of the automobile business. The share of the core auto business in the consolidated profit has fallen to about 60% this fiscal from 80% a year ago. Their share in revenues, albeit, has fallen by a lesser degree— from 85% in the September quarter of the previous fiscal to 80% last quarter.

Another highlight of the company’s September quarter results announcement was the inclusion of a one-time gain from the transfer of the company’s technology to subsidiary companies in net sales.

When the firm’s headline numbers were first reported, its shares spiked, as the one-time gains made even revenue and core profit growth look higher than they actually were. When the fine print become public later, its share price corrected. But even at current levels, and despite the underperformance of the shares this year, Tata Motors’ valuations still look rich at estimated 17 times fiscal 2008 earnings.

Grasim Industries

A historically highest-ever profit by its viscose staple fibre division was responsible for Grasim Industries Ltd’s stand-alone profits after tax rising by 48% to Rs500 crore. VSF realizations were higher by 24% compared with the year-ago period and by 9% compared with the first quarter, as a result of which operating margins rose to 40.3% compared with 36.6% in the first quarter. This business has gained from the rupee appreciation, as it partially offset the steep increase in global pulp prices.

Growth in sales volume was 11% and capacity utilization was 103%.

The cement division clocked a higher turnover growth of 20%, but operating profit growth was a relatively muted 24%, because of the rising cost of imported coal and higher freight costs. Operating margins in the cement business have been hit by these cost pressures, although they were slightly higher than in the year ago period, with price realizations up 4%.

Grasim’s chemical business did well in spite of lower prices compared with the year-ago period, because the shutdown of a captive power plant had affected operations in second quarter of last year. In the sponge iron business, turnover and price realization were both lower than in the first quarter, with the result that not only were operating margins down, but also the division’s operating profits.

UltraTech Cement Ltd, Grasim’s subsidiary, also had a good second quarter, thanks to a 12% rise in domestic sales volume and a 13% rise in realizations. The net impact: operating margins expanded and profit after tax was up 42% year-on-year to Rs184 crore. And that was in spite of lower capacity utilization due to floods and planned maintenance. Grasim’s consolidated results were even better than its stand-alone performance, with profit after tax up 50% to Rs620 crore.

For the future, energy costs are expected to remain high, but these should be offset by higher cement capacity of 90 million tonnes over the next three years, although prices are likely to be under pressure from the end of fiscal 2009.

The VSF business, too, is likely to see cost pressures which will impact margins, but here, too, volume growth will boost profits, with a brown-field expansion expected to become operational by the end of the current fiscal.

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