Will Tata Motors’ profit bounce-back allay investor concerns?

Tata Motors’ operating profit bounced back smartly from the lows of the September quarter. But given the mood the markets are in, investors are unlikely to be impressed


According to the company management, low crude oil prices are one reason automobile sales are doing well. The Indian business, too, is doing better, after reporting massive losses till about a year ago.
According to the company management, low crude oil prices are one reason automobile sales are doing well. The Indian business, too, is doing better, after reporting massive losses till about a year ago.

Tata Motors Ltd’s operating profit bounced back smartly from the lows of the September quarter. But given the mood the markets are in, investors are unlikely to be impressed, especially since reported profit was slightly below estimates. Tata Motors’ American Depository Receipts fell by over 9% in early trade on the New York Stock Exchange, although some of this would be to adjust for the sharp fall in the Indian markets on Thursday.

Consolidated operating profit rose 36% sequentially to Rs.9,380 crore, driven by higher profit in the company’s mainstay luxury cars unit, Jaguar Land Rover (JLR). JLR’s operating profit margin expanded by 220 basis points quarter-on-quarter, on the back of higher volumes and hence better operating leverage. Many analysts were expecting some more—those at Kotak Institutional Equities, for instance, had estimated margins to rise by 290 basis points quarter-on-quarter. To that extent, investors have reason to be disappointed. A basis point is 0.01%.

But note that the company’s shares have fallen by over a third in the past three months, at a time when its performance has improved. The 36% sequential growth in operating profit has come on the back of improved sales at JLR. Recently, JLR reported a 24% increase in retail sales in January, which is much higher than the growth reported in 2015. While the uncertainties of the global economy can’t be ignored, JLR sales have recovered well in recent months. In fact, analysts at Nomura Research said in a recent note that there is an upside risk to its JLR volume assumptions for the current fiscal year.

According to the company management, low crude oil prices are one reason automobile sales are doing well. The Indian business, too, is doing better, after reporting massive losses till about a year ago. But, of course, it is doubtful all this is enough to allay investor concerns in a turbulent market such as this.

The writer does not own shares in the above-mentioned companies.

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