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Excise duty cut raises profit
October, 28th 2009

The excise duty cut on automobiles earlier this year as part of the economic stimulus package is turning out to be a bonanza for local automakers. Last week, Maruti Suzuki doubled its net profit, thanks to huge savings on account of lower excise duty. Now, Tata Motors has managed to do the same as its indirect tax payment fell by nearly third or Rs 26,450 per unit of vehicle sold during the September 2009 quarter.

This fiscal stimulus led to a better-than-expected 110% rise in the companys net profit at Rs 729.14 crore during the September 2009 quarter. Earlier ET Intelligence Group had estimated 77% y-o-y growth in Tata Motors net profit during the quarter.

The total excise duty savings accounting for Rs 266 crore flowed directly into its operating profit excluding other income and resulted in improvements to the tune of 574 basis points in its operating margin to 13.2% of net sales during the second quarter.

If not for the duty cut and vehicle sales remaining the same, company would have reported a marginal 93 basis points improvement in operating margin while the reported net profit would have been lower by 11%. One basis is equivalent to one-hundredth of a percent.

The lower excise duty helped the company more than offset a sharp rise in its interest burden which nearly doubled to Rs 286 crore in the last quarter against Rs 148 crore during the second quarter of the past financial year. In the past six months, the company has been on a debt-raising spree and is also running a public deposit scheme offering higher than bank rates to potential investors. Tata Motors is, however, more than done with its fund-raising programme for now and investors see a fall in its interest burden in the forthcoming quarter.

The numbers suggest that the company has gained only partially from y-o-y fall in metal prices. The auto makers raw material cost declined by just 135 basis points to 60.4% of net sales during the quarter. This is much lower than Hero Honda, which earlier reported a 680-basis point improvement in its raw material cost last quarter.

Continuing with the trend visible in the past few quarters, the company reported a 4% fall in its sales realizations to around Rs 5 lakh per unit. This is on account of higher volume growth in passenger cars and light commercial vehicle, which have a lower sticker price than its heavier trucks and buses.

In the second quarter, the companys passenger car sales were up by 27% y-o-y while commercial vehicle sales (including LVCs) grew by 21%.At its current stock price, the stock is trading at around 30 times its net profit in trailing 12 months and looks expensive. However, the company is uniquely placed to gain from an economic revival, given the launch of a slew of new products across all segments. The company is also set to gain from fresh orders for city buses under the Jawaharlal Nehru Urban Renewal Mission (JNURM).

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