Cost savings under Project Charge drive Jaguar Land Rover’s, consolidated entity’s Ebitda margin in Q3
Head winds to sales growth persist in China (virus), Brexit, domestic market for commercial vehicles
Tata Motors Ltd’s December quarter (Q3 FY20) consolidated net profit of ₹1,756 crore beat Bloomberg’s consensus estimate of a ₹673 crore profit by a mile. It also marked a smart turnaround for the company, given the hefty loss recorded in the year-ago period on the back of huge impairment charges.
Most of the profits came by virtue of deft cost savings, particularly at its subsidiary Jaguar Land Rover Ltd (JLR). According to the company, it extracted cost savings worth £2.9 billion through Project Charge, by containing investments, operating costs and inventories. It hopes to rein in another £1.1 million by end-FY21.
These cost efficiencies helped, especially since JLR’s revenue grew by a meagre 3% year-on-year (y-o-y). Ebitda (earnings before interest, tax, depreciation and amortization) margin zoomed by 350 basis points to 10.8%.
JLR’s margin expansion also powered consolidated Ebitda margin by 140 basis points to 9.9%. This is in spite of a major drag in profitability of the stand-alone domestic entity, where truck sales continue to plummet.
However, the margin expansion may not appease investors as the Street had pencilled in consolidated margins of 12-13% for the quarter on the back of margins of 14% in Q2 FY20. The stand-alone operations are clearly hurting overall numbers.
And there are still multiple headwinds to sales growth. According to Jigar Shah, chief executive of Maybank Kim Eng Securities India Pvt. Ltd, “JLR continues to incur a decline in several key markets and has to successfully transition from Brexit."
And, the outlook in China has turned hazy with the coronavirus threatening the economy.
In a media call, the management said that while the company is monitoring the situation closely, it could impact earnings ahead.
For now, China is once again leading the way to sales growth. Sales rose 24.3% in Q3 as demand expanded for the sixth month in a row. However, US sales showed a flattish trend.
Analysts also point to the impending exit of JLR chief executive Ralph Speth—who will retire in September—as a worry. “Suitable and timely replacement would help mitigate this concern," said Shah of Maybank.
In the domestic market, problems are plenty. Operating leverage is low, given the 33% y-o-y drop in revenue on the back of declining truck sales. BS-VI transition costs, hike in vehicle prices, weak economic activity and axle-load norms that lowered capacity utilization in trucks may continue to dent profitability.
Ebitda margin decline of 800 basis points y-o-y in Q3, in that backdrop, is not surprising.
A steady improvement across global markets, including domestic stand-alone operations, holds the key to future profit growth. Until then, the Tata Motors’ stock may continue to be volatile, as it has been in the recent past.