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Raghuvir Srinivasan

The successful 207 DI which has gained a 40 per cent market share in just a year of its launch.

STRONG revival in the commercial vehicles market, robust demand for passenger cars, especially the Indigo sedan, and the salutary effect of a tight-fisted approach on costs, have all combined to make the September quarter a memorable one for Tata Motors.

Sales rose 46 per cent to Rs 3,763 crore and operating profit 68 per cent to Rs 439 crore. Net profit grew almost four-fold to Rs 206.68 crore while operating margin (including excise duty) improved by a little over a percentage point to 11.66 per cent.

Of course, some of the growth rates appear exaggerated given that the base for comparison, which is the second quarter of 2002-03, was not such a strong one. Yet, there is no denying the fact that there is genuine improvement in the operating parameters and this is largely due to a growing demand for commercial vehicles and passenger cars as also the effect of cost-control measures that have added a layer or two to the bottomline.

The commercial vehicles market is picking up quite strongly if the sales numbers of Tata Motors and Ashok Leyland are anything go by. The availability of easy, low-cost finance and a steady improvement in freight rates appear to be driving demand for commercial vehicles.

Meanwhile, the Indigo has carved out a niche for itself in the entry-level of the mid-size cars segment. The car has been selling an average of 2,300-2,500 units every month since its launch and is certainly a critical component in the improving profitability of Tata Motors. Margins on the car are superior to that of the Indica, given its low development costs and the sharing of components with the latter.

The Indica is maintaining its position in the market; it grew by 14 per cent in the first six months of this fiscal against an 11 per cent growth in the overall market.

Clear road ahead?

There are some favourable factors to look forward to in the second half and the biggest of them all is the beneficial effect of the good monsoon.

The ongoing kharif season is expected to be bountiful which means there will be increased movement of food grains and other commodities to markets and godowns. This will create fresh demand for commercial vehicles, apart from ensuring that freight rates increase or at worst, remain stable. Meanwhile, industrial growth, along with exports, is expected to be good going by projections. This will add to the demand for commercial vehicles.

The passenger car market can also be expected to be buoyant, given the positive sentiment and higher disposable incomes that is the natural result of a growing economy.

From a competitive point of view, Tata Motors appears to be safely positioned in the entry-level mid-size segment with the Indigo while the Indica has carved its own niche in the compact car segment.

The only major worry appears to be on the rising costs of inputs such as steel. This may affect margins of Tata Motors, but there is always the option of passing on the rise to the customer, especially in a strong market as the one prevailing now.

Besides, the company's measures to control costs in other areas such as interest can lend a protective layer if input costs rise.

The Tata Motors stock, after a sharp rise over the last few weeks, has taken a pause. There still appears some scope for appreciation though the pace would be slower compared to the past.

Shareholders can continue to hold the stock for further gains while fresh purchases can await any minor correction from current levels of Rs 375 per share.

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