Tata Motors On A Bumpy Road Due To CV Slump

The automobile industry has been facing the heat of high interest rates and rising fuel prices since the beginning of FY13. Of the many segments, the sales of medium and heavy commercial vehicle (M&HCV) have been affected to the greatest extent. This has been due to additional problems like weak industrial output, lesser activity in construction & mining as well as competition from new entrants.

According to SIAM, the April-January 2013 sales of M&HCVs have declined by 21.37% on a yearly basis. At the same time, however, the sales of light commercial vehicle (LCV) have been robust due to greater adaptation of the hub and spoke model, increasing road connectivity and rising payload. This has resulted in 15.48% YoY growth in LCV sales for the period April-January 2013. Overall, the slump in M&HCVs and growth in LCVs has caused commercial vehicle (CV) sales to see a 0.37% decline in the period under review.

Tata Motors, which has a 60-65% market share in CVs, has obviously been affected by this slump. Its M&HCVs sales for April-January 2013 have been lower by a hefty 28.55%. So far in FY13, the company has had to shut production four times at its truck manufacturing facility in Jamshedpur in attempt to align production with demand, and been forced to cut production by 30-50%. According to media reports, the Jamshedpur facility, which has a manufacturing capacity of approximately 11000 vehicles per month, is currently running at half capacity. The reports also indicate adjustments being made in the promotion and rotation systems to adjust production cycles.

In order to boost sales, companies operating in the CV market have been offering huge discounts, rolling new models out and extending warranties. Just last month, Tata Motors started a four-year extended warranty on its entire range of heavy trucks of 25 tonnes and higher GVW (Gross Vehicle Weight).

All these factors (including the dismal sales of passenger vehicles) have been taking a direct toll on the standalone financial performance of Tata Motors. Hampered volumes resulted in its revenues coming down by 20.30% YoY in Q3FY13. The margins were also hit as a result of lower volumes and promotional measures, resulting in a net loss of Rs 458.49 crore in the same quarter.

This slowdown has proved to be extensive for Tata Motors. A revival in the industry would take place only with a reversal in the macroeconomic situation. We thus expect the pressure on Tata Motors’ performance in the CV space and on its standalone results to continue in the short-run.