Brexit bites Tata Motors as Q1 profit halves on forex loss

Tata Motors consolidated net profit for first quarter fell to Rs2,260.40 from Rs5,254.23 crore a year ago


Tata Motors net sales rose 10% to Rs66,101.27 crore from Rs60,093.79 crore in the same last quarter last year. Photo: Bloomberg
Tata Motors net sales rose 10% to Rs66,101.27 crore from Rs60,093.79 crore in the same last quarter last year. Photo: Bloomberg

Mumbai: Tata Motors Ltd’s consolidated net profit more than halved in the quarter ended 30 June as a foreign exchange loss stemming from the UK’s vote to exit the European Union and higher costs took their toll on India’s largest automaker by revenue.

Consolidated net profit in the quarter fell to Rs.2,260.40 crore from Rs.5,254.23 crore a year ago, missing analyst estimates, said Tata Motors. Net sales rose 10% to Rs.66,101.27 crore from Rs.60,093.79 crore in the same period. Total costs rose 18% to Rs.63,993.99 crore.

A Bloomberg poll of 23 analysts had estimated a quarterly net profit of Rs.2,533 crore on net sales of Rs.65,111 crore.

Stand-alone profit fell 91.12% in the quarter to Rs.25.75 crore from Rs.289.84 crore a year ago. Net sales rose 10.22% to Rs.11,311.24 crore.

Higher sales volumes both at the stand-alone business and the Jaguar Land Rover Ltd unit were “more than offset by the adverse FX (foreign exchange) impact of Rs.2,296 crore and adverse commodity derivatives impact of Rs.167 crore”, the company said in a statement.

Most of the forex loss stemmed from its UK luxury unit Jaguar Land Rover, where net profit fell to £304 million from £492 million in the year-ago quarter, despite a 9.17% increase in revenue to £5.461 billion.

The UK, where a June referendum resulted in a vote favouring the country’s exit from the European Union, has been beset by currency volatility since.

As a result of the volatility, Jaguar Land Rover had to make a higher provision of £123 million, compared with £109 million in the June quarter a year ago. This in turn impacted the company’s operating profit by £207 million, compared with £75 million a year ago, C. Ramakrishnan, chief financial officer at Tata Motors, said in an earnings presentation.

A lot of the volatility in the currency was due to Brexit, as the exit from the European Union has come to be known. Europe accounts for a fourth of sales volumes for the UK subsidiary of Tata Motors. The company also sources 35-40% of its components’ requirements from the region.

Given the free movement of goods within the region, Jaguar Land Rover does not pay any tariff either for sourcing of parts or selling a vehicle in any of the European Union countries. Brexit will change this as the goods sold to and from the European Union will attract duties, potentially making JLR uncompetitive vis-à-vis its German rivals.

This, in turn, could have a more adverse impact on the company’s margins and volumes.

“We will continue to closely monitor the situation in UK and European Union and also China...,” said Ramakrishnan.

“We need to be careful...that is why we have a fairly robust hedge book so we are not subject to so much volatility,” he said, adding that major events that suddenly trigger significant currency movements tend to be a surprise.

Ralf Speth, chief executive at Jaguar Land Rover, said a strong product pipeline of new launches, coupled with the unit’s geographically diversified footprint, will hold the firm in good stead and help weather the impact of Brexit.

Led by strong sales volumes across most markets, sales at Jaguar Land Rover jumped 17% to 134,000 units in the June quarter from a year ago. The growth was led by new models such as F-Pace and XE, which catapulted Jaguar’s overall sales by 63%, 17% in North America, 18% in the UK, 19% in China, and 16% in Europe.

Margins fell short of expectations, falling by one percentage point to 13.8% from a year ago.

Margins were partially impacted by lower local market incentives earned in China this quarter compared with a year ago and a change in the product portfolio to include more high-volume-low-margin vehicles like the Jaguar XE.

Helped by the launch of the Tiago hatchback and growth in sales of medium and heavy commercial vehicles and light trucks, margins at the stand-alone entity bumped up to 5.7% from 4.7% a year ago.

While sales of medium and heavy duty trucks rose 8%, car and light commercial vehicle sales were up 7% and 14%, respectively.

On Friday, shares of Tata Motors closed at Rs.503.65, up 2.01% on BSE.

The Sensex closed at 27,782.25 points, down 0.19%.

Reuters contributed to this story.

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