Street estimates of Tata Motors Ltd’s profitability in the December quarter have proved to be way off target.
According to a Reuters poll, the median estimate of the company’s stand-alone net sales and net profit stood at Rs8,346 crore and Rs443 crore, respectively. The company reported sales of Rs8,930 crore, but its net profit stood at Rs400 crore.
In other words, the company has fallen far short of the street’s expectation of its profit margins. At the operating level, margins fell by 42 basis points against the September quarter. But the main worry is that raw material costs rose by 281 basis points as a percentage of sales. Analysts seem to have factored in a repeat of the firm’s impressive performance in the September quarter, when raw material costs fell by 100 basis points and operating margin rose by 200 basis points sequentially. One basis point is a hundredth of a percentage point.
Graphic: Yogesh Kumar / Mint
While the firm has done well to contain overheads and employee costs in the December quarter, the sharp rise in raw material costs was unexpected, and may lead to a correction in its share price. After all, Tata Motors’ shares have outperformed the market in the past largely based on high expectations about the future. Some of this will have to be tempered after the higher-than-expected increase in raw material costs.
But the main reason the shares have done well in the past few months has been on a belief that Jaguar-Land Rover (JLR) would return to profit soon. The luxury car maker did report an improvement in its performance in the September quarter, but is still burning cash. The consolidated results for the December quarter are thus keenly awaited, given that the stock has primarily run up on high expectations from JLR.
Tata Motors’ shares have displayed a high beta of late. In the recent market correction, while the Nifty has fallen by about 8% from its peak, the Tata Motors stock has fallen by 16%. Any disappointment with its consolidated results is likely to result in a large correction in the stock.
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