Tata Motors Ltd’s luxury car arm Jaguar-Land Rover (JLR) is turning around quite smartly. In the September quarter, the JLR business reported a return to profit at the operating level, after incurring a loss in the June quarter. In the December quarter, the company turned profitable even at the pre-tax level.
Excluding one-off depreciation charges, pre-tax margins stood at 4.2% last quarter, compared with -2.5% in the September quarter and -11.3% in the June quarter. The improvement in performance has been possible because of an increase in volumes. Retail sales of JLR grew by 18% last quarter to 55,300 units after being flat at around 47,000 units for the past four quarters. In the preceding few quarters the company had been forced to cut production to adjust for the inventory with its dealers. The return of retail sales has now enabled it to increase production levels, leading to higher profitability. Inventory (both with the company and dealers) came down to 79 days last quarter, compared with as high as 162 days in the December 2008 quarter.
Photo: Adeel Halim/ Bloomberg; Graphics: Ahmed Raza Khan / Mint
This seems to be resulting in higher price realizations as well. Last quarter, average price realizations rose by 8%. According to analysts, when inventory levels were high, the firm would have had to offer discounts to push sales. Now that inventory levels have fallen, discounts have also become lower, leading to better realizations.
The company’s chief financial officer, C. Ramakrishnan, pointed out in a conference call with analysts that sales realizations rose because of a change in product mix as well as a shift in the geographical mix of its sales.
The increase in volumes coupled with higher realizations has led to the sharp increase in margins. It appears that the company is close to a cash break-even. Cash profit (net profit adjusted for non-cash items such as depreciation) stood at £179 million (Rs1,265.53 crore) last quarter. Based on the company’s disclosures, its quarterly capital expenditure (including product development expenses) is between £140 million and £160 million.
Free cash flow generation doesn’t seem to have been achieved yet, though, based on the company’s net debt. Adjusted for the proceeds from its global depository receipts issue in early October, net debt of the company’s core auto business should have come down to Rs22,500 crore.
Instead, the company has reported a net debt of Rs23,100 crore. Even though JLR’s performance has improved, free cash flow generation still seems to be some time away.
Tata Motors’ shares have been among the best performers lately because of the improvement in the company’s profit. But as Nomura Research Institute Ltd put it in a report earlier this month, “Tata Motors remains the most expensive stock in our coverage universe based on free cash flow generation. Its free cash flow is likely to be negative in FY11. It is trading at 37 times estimated free cash flow for FY12, after building in a strong recovery for JLR.”