Tata Motors Powers Its Way to Higher Profits
Four years after piling on debt to acquire Jaguar-Land Rover, Tata Motors is defying naysayers by reporting soaring revenues and profits, as well as sharply higher margins.
Tata Motors Co (TTMT.IN), one division of the massive Indian Tata Group enterprise, made its name, in part, by manufacturing what it bills as the world’s cheapest car – the Tata Nano, which retails for about $3,000 – and in its last fiscal year sold more than 1.25 million of this and other vehicles that it makes. But Tata Motors has recently shifted to the other end of the spectrum, outbidding rivals from around the world to snap up Jaguar-Land Rover when Ford auctioned off that upscale auto business in 2009, paying what analysts at the time viewed as an excessive $2.5 billion for those brands.The deal increased Tata Motors exposure to markets outside India, but more than 40% of revenues still come from the Indian subcontinent.
In retrospect, however, the deal appears to be a savvy move. True, at the time, Tata Motors ended up taking on an additional $2.5 billion in debt to finance the transaction at a time when the global automobile industry was going through a rough patch. Indeed, between 2008 and 2009, Tata Motors’ total long-term debt ballooned from slightly more than $2 billion to a whopping $7 billion, including other investments in new plants made by the company during the same period (the largest investment being the new plant for the ambitious Tata Nano). Today, however, the company’s financial picture is much more robust than that historical data would have seemed to augur.
Tata Motors has seen its revenues double, on average, every year from 2007 to 2011, rising from just north of $7 billion in 2007 to $35 billion by 2011. Its profits, meanwhile, have soared at a similar clip, from just less than $500 million to more than $2.5 billion in the same time frame. Moreover, the acquisition of Jaguar-Land Rover has proved to be a boon for margins at Tata Motors, since the former’s premium vehicles sell at significantly higher prices than Tata’s bread and butter business of building cars for its domestic market in India. In 2009, in the wake of the merger, Tata Motors had a negative trailing four-quarter return on net operating assets (RNOA), but a management shakeup right after the JLR acquisition has helped spark a revitalization, as the company took a closer look at its asset base. Today, the company’s RNOA stands at an impressive 38%, well above the industry median of 17.3%, signaling that Tata Motors now is using its assets more effectively than are its competitors.
A similar transformation is visible in the company’s free cash flow, which was negative in 2009, but which has increased every since then. In the most recent fiscal year ended March 31, 2012, Tata Motors generated almost $1 billion in free cash flow. While it has continued to increase its capital spending, this hasn’t been indiscriminate; indeed, those higher levels of capital expenditures have been adequately funded out of Tata Motors’ cash flow from operations. For the 2011 fiscal year, capital spending hit a company record of 139 billion Indian rupees (about $2.5 billion), cash flow from operations of 184 billion rupees more than covered that spending. Most of that spending has been as a result of the company’s decision to expand the production capacity for the latest version of its popular Indica passenger car. This signal that capital is being used more efficiently is a good sign for future earnings. The more focused capital spending and stronger operating metrics (such as the RNOA) explain why Tata Motors now scores 96 on the StarMine Earnings Quality (EQ) model. Such a high score signals that the company’s earnings seem to be coming from sustainable sources and are likely to remain strong in the coming quarters.
The economic backdrop for Tata Motors and other Indian companies is a trickier matter, of course. Still, what passes foran economic slowdown in India – the country’s GDP growth grew “only” 5.5% in the second quarter – is a healthy clip compared to developed economies. The government has responded to the slower pace of growth in 2012 by cutting interest rates, and economists now forecast that India’s economy will resume growing more rapidly in the coming quarters. That would help Tata Motors, whose revenues and profits in India have slowed along with consumer spending and the economy itself.Although 40% of Tata Motors’ sales come from the Indian market, where it has a 13% market share, the Jaguar-Land Rover division accounts for more than 60% of the company’s revenues and more than 90% of its profits. That leaves Tata Motors with a lot of room to grow in the domestic (Indian) market. The introduction of the Indica V2 model, along with the economic rebound and the lower interest rates (customers rely on financing to purchase their automobiles) in India, likely will prove to be a boon for Tata’s earnings in the coming quarters.
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