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When Britain voted to leave the European Union, it seemed like Tata Motors Ltd would be among the worst hit Indian companies. Its shares fell as much as 8% when the news hit the Street because of worries about the impact on its UK subsidiary, Jaguar Land Rover (JLR).
At first look, the company’s June quarter results seem to revive some of those fears. JLR’s profit before tax and exceptional items fell as much as 45% year-on-year, largely on account of adverse forex movement. In addition to the sharp fall in JLR’s profit, the adoption of Ind-AS also worked against the company in the past quarter. Net profit on a consolidated basis fell by as much as 57%.
But investors are likely to ignore these as one-off impacts and focus on the strong growth in JLR sales and the reception some of its new models have received in the markets.
The company said in a call with analysts that the F-Pace model it launched earlier in the year has been received well and has a waiting period of three-to-four months. Launched in April this year, the F-Pace accounted for nearly 40% of total Jaguar sales last quarter. The XE did well, too, accounting for one-fourth of total Jaguar sales. In the Land Rover stable, the recently launched Evoque Convertible has created some excitement in the market.
As a luxury car maker should, Tata Motors spends large amounts on research and development. With the recent success it has had with new product launches, it looks like these investments are coming good. To be sure, Tata Motors’ shares have risen by about 90% from its lows in February, when fears of a slowdown in China had hit investor sentiment. And the stock has not only recovered all of the losses since the Brexit announcement, but has risen compared with pre-Brexit levels.
In the backdrop of improving sales and the success of new models, investors may ignore the large drop in the June quarter profit, since a large part of it was owing to currency fluctuations. The pound had depreciated sharply post Brexit, resulting in losses on derivatives contracts used by the company to hedge its exposure to other currencies. Besides, the restatement of assets and liabilities as on 30 June also led to forex losses worth £84 million.
According to the company, a weak pound will result in losses only till the time the derivatives contracts it executed when the pound was stronger are in force. In the long run, a weak pound will work to its advantage, since JLR sells about 80% of its vehicles outside the UK. It does import 40% of its components, on which it will take a hit on the forex front—but on a net basis, it will gain from a weak pound. Of course, Brexit could lead to other complications, such as incremental tariffs, but this depends on how the trade agreements are negotiated.
Thanks to the adoption of Ind-AS, the profit for the year-ago June quarter was restated upwards by around Rs.2,500 crore, largely owing to the difference in the way gains/losses on forex derivatives is accounted for. Devoid of such a large gain this time around, profit fell sharply.