Tata Motors Ltd’s luxury car arm Jaguar-Land Rover (JLR) reported a cash profit of £22 million (around Rs169 crore) for the September quarter, compared with a loss of £49 million in the June quarter. Cash profit represents net profit adjusted for non-cash items such as depreciation. The return to profitability indicates a fairly decent improvement in business fundamentals at JLR.
But note that this is after capitalizing about £100 million of product development expenses. Besides, the company incurred normal capital expenditure of £90 million last quarter, up from £50 million in the June quarter. Accounting for these, free cash flow stood at a negative £168 million last quarter, compared with -£199 million in the June quarter. Purists would argue that this isn’t the right way to arrive at free cash flow, since changes in working capital are not known. But then, the company doesn’t provide a balance sheet or a cash flow statement and one has to make do with such approximations. There’s little doubt, however, that JLR is still burning loads of cash. This is also reflected in the increase in Tata Motors’ net debt position by 10% last quarter to Rs24,200 crore.
Graphics: Naveen Kumar Saini / Mint
What’s more, these are only the results of JLR’s operating subsidiaries, which don’t fully capture the cost of the colossal debt Tata Motors has incurred to acquire the company and keep it running. JLR’s profit statement puts interest costs at £10 million, while Tata Motors’ total interest costs stood at Rs559 crore last quarter. In many ways, what JLR’s profit and loss statement shows is but a mirage.
This is not to say that JLR’s performance hasn’t improved at all. Since early this year, the luxury car maker has been busy cutting inventory with dealers owing to the slowdown in retail sales. Its wholesale volumes (that is sales to dealers) were 30% and 24% lower compared with retail sales volumes in the March and June quarters, respectively.
As a result, inventory with itself and with dealers corrected from as high as 162 days sales at the end of December 2008 to 102 days by end-June. With inventories having corrected substantially, the company has resumed wholesale sales at levels that are close to retail sales volumes. In the September quarter, sales to dealers rose by 23% compared with the June quarter. This would have involved a rise in production, leading to better absorption of fixed costs and hence better profit margins.
According to the company management, JLR also benefited from cost-cutting measures. But an analyst with a foreign brokerage says that the improvement in margins seems to be primarily because of the benefit of higher production. He adds that when inventory was high earlier in the year, the company may well have indulged dealers with more discounts, which could now be withdrawn. For margins to improve further, however, retail sales need to grow. Unfortunately, these have been stagnant for the past four quarters.
Tata Motors’ shares have run up sharply in anticipation of JLR’s return to profit. Some market participants may be enthused to see it actually happen. But the fact that cash burn continues means that the company may need to continue tapping the markets to raise funds, which can be value destructive for existing stakeholders.
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