Tata Motors: valuation factors in robust performance
The results allay concerns about UK-subsidiary Jaguar Land Rover's ability to contain debt, generate free cash flow and maintain profitability
Tata Motors Ltd’s robust September-quarter performance has reinforced investor confidence in the stock. The company’s shares rose 3.7% on the New York Stock Exchange on Friday after the company’s results announcement, which came after the Indian markets had closed. While Tata Motors easily beat Street estimates on consolidated net sales and profit, its results also allay concerns about the firm’s UK-subsidiary Jaguar Land Rover Plc’s (JLR) ability to contain debt, generate free cash flow and maintain profitability amid ambitious expansion plans.
In the September quarter, JLR’s free cash flow (after accounting for capex) jumped by over three-and-a-half times compared with a year ago. A media statement indicated cash and financial deposits of £2.7 billion and “long-term uncommitted bank lines of £1.7 billion. This gives comfort for the huge £2.75 billion capex plan drawn up for the current fiscal. Analysts are confident that cash flow will improve further in fiscal 2015. This is on the back of new product launches, which have been well accepted across geographies.
Compared with a year ago, JLR sold 42% more vehicles in China, 3% more in Europe and 12% more in the UK, addressing some of the skepticism about weakening sales in these markets.
Net revenue surged 40% year-on-year. Despite a dip in average realizations, the rise in volumes and the resultant operating leverage helped the firm maintain profit margin. The operating margin of 16.1% was marginally higher than a year ago.
JLR’s strong results—it accounted for over 70% of Tata Motors’ consolidated revenue and 100% of the profit—has more than offset the domestic stand-alone entity’s weak performance. Thanks to falling commercial vehicle sales, the firm continues to clock losses, a situation which is expected to continue until the end of this fiscal. In fact, the scenario is a marked contrast to that in end-2009, when analysts were debating if JLR’s losses would weigh down Tata Motors’ consolidated profits. The management said it expects pain to continue in the domestic markets for some more time.
Besides, the Tata Motors stock’s run up in the recent past—42% since April, about twice that of the BSE auto index and four times that of the benchmark Sensex—has factored in the positives in JLR operations. If anything, steady volumes and an improvement in market share in overseas territories could lead to a marginal re-rating in the valuation.
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