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Raghuvir Srinivasan

The current quarter is likely to be an extremely strong one for commercial vehicles

TATA Motors shareholders can continue to hold the stock in the near term. The company has reported yet another impressive performance in the third quarter despite margin pressures.

Shareholders can review their strategy towards the end of the current quarter, which is likely to be good.

Tata Motors has been cautioning since the last two quarters about the impact of rising input costs on its margins. The third quarter numbers clearly reflect this caution as higher raw material costs have brought operating margins under pressure.

Operating margin for the third quarter is down by a percentage point to 11.4 per cent even as raw material cost, as a percentage of sales, has risen by five percentage points.

In fact, the rise in raw material cost of 41 per cent during the quarter is disproportionate to the growth in sales, which was just 29 per cent.

This clearly indicates the cost pressures the company is facing. For the second quarter in succession, finance costs have increased, though the increase in the third quarter is not as high as in the last one. Gross interest is up marginally at Rs 54.89 crore compared to Rs 52.64 crore in the corresponding previous period though it was lower at the net level (after capitalisation and accounting for interest income).

Though borrowings rose during the last nine months, the company has also built up a healthy cash chest that is higher than the outstanding debt of the company.

Probably for the first time in recent quarters, Tata Motors has a negative net debt position, that is, cash reserves are higher than outstanding debt.

The positive news on the financial front is, indeed, welcome as the next few quarters could prove to be challenging for the company. The implementation of Bharat Stage III norms in 11 cities and Stage II in the rest of the country from April 1 could prove to be a big challenge for Tata Motors, as indeed for the entire industry.

First, the sales volumes are likely to be loaded on to the current quarter as fleet operators rush to buy their vehicles before the new norms come in, which will mean higher costs for them.

The challenge for Tata Motors lies in meeting the demand in the current quarter even as it prepares for dull trends in the first quarter and, probably, even the second one of 2005-06.

Second, the company has to find a way to manage the increased costs following implementation of the new norms. It has to decide between absorbing the higher cost and passing it on to the market.

Given that it has only recently revised prices upwards on its commercial vehicles, Tata Motors may probably settle for a mix of the two by passing on only a part of the higher costs. This will mean that margins will come under higher pressure.

The proposed launch of high capacity commercial vehicles from the Daewoo stable and a low tonnage pick-up truck later this calendar year should strengthen the company's position in the market.

In the passenger car market, the company has lesser worries as both its mid-range offers — Indigo and Marina — are doing extremely well while Indica is delivering steadily on volumes. However, competition is getting stiffer with the entry of a couple of new models from Ford and Hyundai.

The merger of Tata Finance with itself is likely to be a positive for Tata Motors as it will enable complete control over the vehicle financing business. The tax shelter that Tata Motors will now get from the Rs 500 crore accumulated losses of the former and the minimal equity dilution of 4 per cent are other positives from the deal.

The near-term appears promising for Tata Motors both in commercial vehicles and passenger cars. However, the optimism has to be tempered by the outlook on input costs, which are projected to remain high and the impact on the vehicle market of the new emission control norms.

Shareholders can stay invested for now to capitalise on the expected good performance in the current quarter.

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