Tata Motors Ltd’s shares have underperformed the market by as much as 23% since the company reported its results for fiscal 2011 in end-May. This was partly because of concerns that the company’s profit margins will be lower than what analysts had anticipated earlier. The June quarter results provide hardly any reason to change this view.

Profit margins continue to be under pressure. Margins in the domestic business fell by 290 basis points year-on-year (y-o-y) and were lower compared with even the low base in the March quarter. This is despite an increase in the proportion of light commercial vehicles (that are more profitable) in total sales. While raw material costs continue to be high, other expenditure shot up in the June quarter. According to the company, there are no one-offs in the other expenditure component, and costs are higher because of inflation and higher marketing expenses.

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Tata Motors’ chief financial officer C. Ramakrishnan, in a post-earnings conference call, noted that margins in the domestic business will continue to be under pressure. Besides, volumes, especially in the key medium and heavy truck business, were sluggish.

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Profit margins of the company’s subsidiaries also fell by 72 basis points y-o-y, owing to raw material cost pressures. Jaguar Land Rover (JLR) reported a healthy 20% growth in revenue and a 17% increase in operating profit based on Indian GAAP. The luxury car maker again benefited from increasing price realizations as a result of rising proportion of the newly introduced vehicles in total sales. It’s worthwhile to note, however, that based on International Financial Reporting Standards, its operating profit rose by 10% and margins fell by 120 basis points y-o-y.

Also, net interest costs rose 36% as rates increased. So, while consolidated operating profit rose by around 13% y-o-y, profit before tax and exceptional items rose by only 4%.

In summary, JLR did well in terms of increasing revenue productivity and growth, while domestic operations disappointed both in terms of sluggish volume growth and lower margins. The outlook for medium and heavy truck sales isn’t very bright either. Growth is slowing because of rising costs, interest rates and an expectation of lower industrial growth. This is also evident from the fact that freight rates across major routes remained flat in the June quarter, despite the fact that fuel costs were rising.

Of course, not all of the correction in Tata Motors’ shares is owing to disappointment with the company’s March quarter results and concerns about a drop in the performance of domestic operations. Investors are also concerned that the company will be affected badly in the event of a slowdown in developed countries, especially since JLR has been driving performance in recent quarters. Since JLR has a high operating and financial leverage, concerns about debt-servicing may resurface in the event of a global slowdown. Some caution is, therefore, warranted.

But considering that the company’s shares have already corrected sharply, they can also be expected to bounce back sharply when the market returns to normalcy.

Graphic by Ahmed Raza Khan/Mint

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