Short note:

Tata Motors is known for its famous acquisition of JLR from Ford, and recently by an impressive turnaround from the company’s severe debt crisis. From FY21 onwards, the company had gradually regained its footing and demonstrated remarkable financials performance over the past 12-15 months, which gained the confidence among investors. Which could be the evidence for a 130% rally in FY24.

Scope:

For the analysis, I have used data from FY18 to FY23, with some instances incorporating quarterly earnings reports from April 2023 to December 2023 to improve understanding. It's important to note that the industry primarily operates on volume, meaning thin margins may not accurately reflect operational efficiency, this aspect would be further analyzed in subsequent industry check for Tata motors.

Revenue and Cost:

Examining the revenue, there was a 3.5% Compound Annual Growth Rate (CAGR) over the six-year period from FY18, adding to which the revenue has increased by 17.8% in the last two years (FY21 to FY23). The company had continued to maintained the momentum over the 9-month period of FY24 with generating revenue of approximately 3.16 lakh crores.

On average, the cost of materials consumed for 57.9% of expenses over the period, while employee costs averaged 10.5%. However, the employee related expenses were slightly lower for FY23 and the first nine months of FY24. Profit before tax (PBT) margins were negative for four out of six years, with FY18 showing the most efficient margin at 3.8%. Also note, the margin for the 9-month period of FY24 was 5.6%.

Margins:

Analyzing net gains in comparison with assets, equity, and capital employed reveals a consistent negative return for 75% of the period under review. However, the post-FY21 period marked a notable turnaround, with the first nine months of FY24 showing particularly promising numbers, as outlined in the table below.

To have a better understanding in monetary terms, if the company was able to save just 1% of its total expenses during FY23, the net gains for equity holders would have increased from 2,414 crores to 5,920 crores. Which also would have pushed the EPS from Rs.6.3 to Rs.15.4. Similarly, for the last 9 months, the net profit could have been 17,216 crores instead of the current 14,000 crores and EPS to Rs.44.9 from 36.5. So thinner margin doesn’t actually describe the company's effectiveness when managing its funds but the nature of industry.

Solvency:

The company currently holds a long-term debt of approximately 88 thousand crores, which, when combined with short-term debt and other debt-related items, amounts to 1.48 lakh crore. In FY22, this comprised 97.76 thousand crores in long-term debt and 1.59 lakh crores when factoring in other debt-related items. The consolidated debt of the company includes debt from its subsidiaries, TMFL (Tata Motors Finance Limited) and TMFSL (Tata Motors Finance Solutions Limited). With the proceeds from Tata technologies IPO and a positive operating cash flows during this financial year, analysts are expecting that the company will significantly reduce its debt and continued to do the same. Based on management statements over the past 1-2 years, they are in focused on reaching a positive net debt state.

Liquidity:

The company's current ratio has consistently hovered around 1 throughout the period. Approximately 7% of current liabilities, on average, have been allocated for provisions related to legal, product warranties, and other similar items. The current borrowings and other financial obligations have constituted approximately 35.6% of current liabilities over the period. The quick ratio has averaged about 0.7 during this time frame, with the company managing to sustain it above 0.75 for the past three fiscal years. Based on these figures and ratios, it can be observed that the company faces challenges in meeting its short-term obligations. However, there are clear signs of improvement over the period, and continued progress in the coming years could provide greater liquidity for the company.

Working capital cycle:

The company had a negative working capital cycle ranging from 36.3 to 64.5 days throughout the period, with an average of 44.2 days. Inventory turnover, which indicates the company's ability to convert inventory into finished products, averaged at 83.6 days, which had gradually decreased from 93.2 days in FY21 to 71.4 in FY23. Receivables conversion has been notably efficient, with an average collection period of just 19 days from its customers.

However, the payables outstanding have been consistently high, averaging 146.7 days over the period, although this decreased from 176 days in FY21 to 126.3 in FY23. Favorably, nearly 95% of payables were not aged more than a year in FY23, this could be the favorable terms with suppliers. From these measures, we can infer that the company on an average only needed to repay its suppliers on once every 3-4 months.

From this, I believe the positive payables terms are helping the company significantly to mitigate liquidity crunches and maintain operational efficiency.

Date - 27th Feb '24; Source - Company Annual reports ;

LR