There’s little hope for Tata Motors with JLR in dire straits

News of Jaguar Land Rover’s (JLR’s) two-week plant shutdown at Solihull in the UK did not go down well with investors of Tata Motors Ltd. After hitting new lows almost every day in the last five trading sessions, the stock plunged over 13% on Tuesday. The Solihull plant shutdown follows an earlier announcement of a three-day week at its Bromwich plant, also in the UK. The 12.3% year-on-year drop in JLR’s September retail sales accelerated the fall over the last three months. According to the company, the China market continues to be unsettled following “tariff changes and trade tensions” that pulled down retail sales by 46.2% in the region.

Naturally, the dashing of the hopes of cashing in on China, which readily accepted its vehicles earlier and where JLR cars sold like hot cakes until recently, is likely to be a severe blow to revenue and profits.

That’s not all. UK and Germany sales fell by 20% and 31% year-on-year, respectively, due to reduced diesel demand, while US sales, which were growing, also dipped by 5.5%.

Certainly, all is not well at JLR. About two years ago, trouble started with currency woes, following Brexit, which impacted profitability. Then they had falling sales due to makeovers and new model introduction. And now, macroeconomic issues such as the US-China trade war and the global drive towards lower carbon dioxide emissions from vehicles have led to a slump in sales of luxury diesel cars.

Braving these headwinds has not been easy for JLR. Its profitability, which grew by leaps and bounds after the turnaround, has been under pressure since the last 8-10 quarters. Its June quarter Ebitda (earnings before interest, tax, depreciation and amortization) margin was an abysmal 6.2%, the lowest in several quarters.

So, with Tata Motors’ cash cow in dire straits, there is little hope for a quick turnaround for the company as a whole. The firm posted a consolidated loss in the June quarter, which is likely to deepen in the September quarter. To be sure, the stand-alone commercial vehicle and passenger car business is riding a high, but it is hardly material to earnings.

A report by Motilal Oswal Securities Ltd that mirrors the sentiment on the Street indicates a 35% and 13% cut in earnings estimates for FY19 and FY20, respectively. This was prior to the news of the Solihull plant shutdown.

True, given the company’s pedigree, there is some confidence that the storm will pass and there will be brighter days ahead. But how long it would be before Tata Motors and the stock recoup their losses is anybody’s guess.