Tata Motors Ltd has reported results that are way beyond the Street expectations. Consolidated net profit stood at Rs1,989 crore, compared with a median estimate of net profit of Rs980 crore, based on a Reuters poll. But, even while analysts’ estimates were much lower, the markets seem to have anticipated the good results. Tata Motors’ share price rose by as much as 15% in the run-up to the results in the past week.

All of the outperformance vis-à-vis analysts’ estimates has come about in the JaguarLand Rover (JLR) business. Earnings before interest, tax, depreciation and amortization (Ebitda) of Tata Motors’ stand-alone operations, which represents its home-grown business, fell by 4.7% compared with the March quarter. This was on the back of a 15% drop in revenue, owing to a drop in volumes compared with the traditionally strong March quarter. Tata Motors did well to contain raw material costs at March quarter levels, at a time when competitors have taken a hit owing to rising commodity prices. Besides, it managed savings on other overheads and reported a 120 basis points improvement in margins sequentially.

One basis point is equivalent to one-hundredth of a percentage point.

But the major improvement in performance happened at JLR, whose Ebitda jumped as much as 50% quarter-on-quarter on the back of a 10.5% rise in revenue. JLR accounts for over half the company’s consolidated revenue and an improvement in its performance affects consolidated results to a considerable extent.

JLR’s volumes have been rising, thanks to the success of new launches. JLR’s product mix includes a higher proportion of models launched this year, which has also helped in higher realizations. The variable marketing costs have been falling along with the rise in volumes since the middle of last year. But also note that favourable currency movements have lifted both JLR’s revenue and its margins. The company has a high proportion of US dollar-denominated exports as well as relatively high euro-denominated imports, and both these currencies moved favourably against the pound, resulting in higher revenue as well as margins. According to an analyst, the June quarter consolidated margins of 15.5% may not be sustainable because of the high contribution of forex-related gains last quarter.

Even so, the sharp improvement in performance last quarter will result in an increase in earnings estimates for the year and, perhaps, even the next. Another positive surprise in last quarter’s results was that JLR turned free-cash flow positive after accounting for capital expenditure and product development expenses of £270 million (around Rs2,000 crore).

If the company is able to sustain performance as far as cash flow generation is concerned, it will be a big positive. In the past four quarters, the company has reported cumulative Ebitda of around Rs12,000 crore. Still, the net debt position of its automotive business has declined only marginally, from Rs21,900 crore a year ago to Rs19,983 crore currently. Note that this is after raising equity worth Rs1,700 crore, converting bonds worth Rs1,600 crore and raising cash worth Rs1,150 crore though a stake sale in a subsidiary. If not for these, the company would have had to raise more debt, despite the high profit generation.

Investors, however, are quite comfortable with the company’s debt position and as long as profits are rising, shares should continue to perform well. The lack of free cash flow generation, anyway, hasn’t affected the shares in the past.

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