For Tata Motors, the worst may be already behind

The company reported a net loss of ₹4,441 crore, similar to the ₹4,453 crore of the previous quarter. On a consolidated basis, the automaker reported 14.7% growth in its net revenues. That said, revenues were down 7% sequentially.

The impact of weak JLR sales volumes was visible. The Q2FY22 retail sales for JLR at 92,700 units were down 18% from a year ago. The wholesale volumes declined 13% to 64,000. What’s more is that JLR’s Ebitda margins at 7.3% were much lower than the 9% of the previous quarter and the 11.1% in the year-ago quarter. Ebitda stands for earnings before interest, tax, depreciation, and amortization,

The standalone revenues though got a boost from a strong pick-up in passenger vehicle (PV) sales and rebounding commercial vehicles (CV) sales. However, higher commodity costs played spoilsport. The India margins at 3.9% were below estimates of 6%, said analysts at Credit Suisse Research. The margins in the domestic CV business were impacted due to high commodity costs, a weak product mix, and high incentives because of competitive intensity, pointed out analysts at HSBC Securities and Capital Markets (India) Private Ltd.

However, the outlook is not dire and perhaps the worst is over for the company. Tata Motors expects the chip supply situation to gradually start improving during the second half of FY22, which should help improve the performance of its JLR operations. The company has a strong order book of 125,000 units at JLR, it said. In addition, Tata Motors said that it is working on prioritization of higher-margin models and models less dependent on chips.

In the domestic market, PV sales are gaining strong traction and with economic recovery, CV sales are also expected to improve. The rising fleet utilizations and rentals may push sales further. In PVs, the company achieved 11.3% quarterly market share while reporting the highest wholesale numbers in the past 33 quarters. In the CV segment, too, the company’s market share at 44.6% shows its dominance. The company said that it gained market share across all four segments in Q2FY22, including medium and heavy commercial vehicles, light commercial vehicles, small commercial vehicles, and buses.

“Positively, the profitability of the domestic PV business saw a decent uptick and was better than the CV business in 1HFY22 for the first time in many years," said analysts at HSBC. Standalone margins may have missed expectations largely because of commodity cost headwinds, but at 4.0% they were better than 2.5% and 2.9% reported during the previous quarter and the year-ago quarter, respectively.

Even the Ebit margin performance in the JLR business was decent considering the steep volume loss, said analysts. The management has lowered breakeven in FY22 to mitigate constraints caused by chip shortages. It expects a breakeven at 350,000 units per annum for JLR compared to 400,000 at the end of FY21.

Overall analysts remain confident about the company’s outlook. “We expect JLR’s FY21-24 volume CAGR (compound annual growth rate) at 13%, FY24 EBITDA margin at 14.5%, and 7% EBIT, led by improved mix on new Range Rover launch," said analysts at Elara Securities (India) Pvt. Ltd. They also expect FY21-24 standalone volume CAGR at 30%, on CV cycle recovery. The strong PV order book for launches such as Punch and Tigor Electric Vehicles (EVs) and margin-accretive market share gains will benefit, too, said analysts.

The EV roll-out in India is being looked at with optimism and the company plans to roll out 10 EV models by FY24. That said, for JLR the competition on the EV front is significant and therefore analysts remain watchful on the EV progress. While most negatives owing to the chip shortage and pressure on margins are being priced in, the company’s shares hardly moved in response to the Q2 performance. The performance of JLR and resilience in domestic business would determine valuations for Tata Motors.