Rising raw materials cost denting TATA Motors profit

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Indian workers assemble a Tata car at the Tata Motors factory in Pune. Photo - Rob Elliott/AFP/Getty Images

Increasing cost of raw materials and currency fluctuations resulted in declining profits of TATA Motors as its second quarter net income shows a decline in comparison to last year.

Bloomberg estimates a drop in profit by Rs20.9 billion ($411 million). Although the sales increased by 27 percent to 359.4 billion rupees, quarterly losses are mainly due to the slide of rupee against the US dollar triggered by revaluation of outstanding foreign currency borrowings.

Rising prices of raw materials like steel and aluminium along with massive money spent on marketing of cars in India has led to the increase in costs by 30 percent, TATA Chief Financial Officer C. Ramakrishnan explained. The costs of raw materials increased to 221.1 billion this yearfrom 170.2 billion rupees last year.

Analystsevaluating the slowdown in the Indian market said marketing would play a significant role in the coming year as the pressure on the margins will always remain.

On revaluation of outstanding foreign currency borrowings in comparison with a gain of 1.3 billion rupees in the earlier quarter, Tata Motors incurred a loss of Rs4.4 billion (US$86.6 million) mainly because of decreasing value of rupee. According to Bloomberg this quarter brought out the worst performance in Asia, bringing down the value of rupee by 8.7 percent against the US dollar.

Rising fuel prices and interest rates in India have dampened the demand of Tata Motors passenger vehicles by 22 percent to 60,340 units in the three months through 30 September, excluding Jaguar and Land Rover. Nanos, worlds cheapest cars, deliveries plunged 67 percent in the quarter to 7,398 units.

The Society of Indian Automobile Manufacturers believes annual industry vehicle sales will expand at the slowest pace in three years, already cutting its forecast for nationwide deliveries twice this year.

Last month, Indias central bank raised key interest rates for the 13th time since mid-march 2010. Europes debt crisis may cause a global slump, and therefore nations from Brazil to South Korea are either holding or cutting their rates. Company also defined Europes situation as unpredictable, overcoming the situations by emerging market sales.

Tata Motors is currently focusing on generating its revenue and ambitions from British luxury brands it purchased from Ford Motor Co. Sales of Jaguar and Land Rover vehicles in China and Russia rose to 23 percent in the quarter wherein sales of Jaguar declined by 7 percent while Land Rovers increased by 34 percent.

Evoque sport-utility vehicle,its new luxury model, was released in September. The company plans to introduce a new Defender model in 2015. It sold 7,700 units of Evoque till September and got a positive response for the new Jaguar XF with 2.2 liter diesel engine.

As per the analysts, Tata Motors looks favourable as the new Evoque and the new XF will boost the sales. Indian passenger car sales are also forecasted to rise in the March quarter.

Industrial action at Maruti Suzuki India Ltd. and rising borrowing costs resulted in tumbling sales of Indian passenger vehicles continuously for the past few months. The central bank had to raise interest rates to contain inflation as personal loans have been the most prominent factor resulting in purchase of cars and driving up demand.

Sources:Bloomberg

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