Tata Motors has a bumpy ride ahead, with JLR misfiring

The deplorable set of numbers put forth by Tata Motors for the December quarter practically writes off the stock’s near-term prospects


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

There are many reasons for the Tata Motors Ltd stock to have a bumpy ride—they range from the Brexit effect to Cyrus Mistry’s exit and more recently, demonetization. And now, we have a deplorable set of numbers put forth by the company for the December quarter, which practically writes off the stock’s near-term prospects. Not surprisingly, the stock plunged by 4% and its DVR (differential voting rights) tanked even harder by 6% after the results were announced.

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Although the consolidated net revenue at Rs66,855.1 crore was in tune with Street estimates, it was the operating performance that was the biggest let-down. It was harder to fathom because the UK subsidiary Jaguar Land Rover Ltd (JLR), which has been leading profits higher quarter after quarter, for the first time hugely failed investors.

Consolidated operating margin fell by about 500 basis points to 7.6% from a year ago, mainly because JLR’s upward margin trajectory was punctured. It contracted from 14.4% to 9.3%—the first time to single digits since fiscal year 2010. The Tata Motors management in its media meet explained that runout in one of its premium models, significant marketing expenses, biennial salary negotiations and new model launches led to this margin drop. Add to this an unfavourable currency and product mix too.

One wonders though, if its new product lines are yielding lower profit margins. Indeed, JLR sales have been maintained thanks to the expansion in US markets, even when China briefly wobbled and Europe was still inching up. But higher market penetration and share led to margin erosion during the quarter. The consequent weak operating profit trickled down to weaker net profit, almost half of that clocked a year back.

The story was similar for the stand-alone company on home ground too. Demonetization impacted commercial vehicle sales, though its passenger cars fared better than the industry during the quarter. But again, it was the 345 basis points drop in operating margin to 1.5% that was a big let-down from the Street’s expectation of 4.2%. Net loss at Rs1,000 crore was more severe than that charted out by brokerage firms.

Therefore, the consolidated net profit of Rs111.6 crore was a distant cry from the ambitious average expectation of Rs2,264.5 crore by 20 Bloomberg analysts.

For now, it does not appear that the results disappointed on account of any one-off provisions or write-offs. Therefore, a bigger slide in the Tata Motors stock, which closed at Rs486.80 on Tuesday, may not be surprising. Certainly, brokerage firms will trim the earnings forecast for the near term.

Yes, it cannot be ignored that JLR, the prized cash-cow of Tata Motors, is continuing to add sales volumes. What needs to be watched is whether growth will come at the cost of margins. If so, it will cap the earnings momentum leading to an erosion in valuation too.

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