The new Land Rover Defender sports utility vehicle, manufactured by Jaguar Land Rover Plc, sits on display on the opening day of the IAA Frankfurt Motor Show in Frankfurt, Germany (Photo: Bloomberg)
The new Land Rover Defender sports utility vehicle, manufactured by Jaguar Land Rover Plc, sits on display on the opening day of the IAA Frankfurt Motor Show in Frankfurt, Germany (Photo: Bloomberg)

JLR’s China sales are up, but it’s too early to call recovery at Tata Motors

  • It is too early to hope for a turnaround, amid continued turbulence in the automobile industry, globally
  • Weak sales and capacity utilization have been translating into negative operating leverage; thus, profit margins are expected to remain under pressure

Tata Motors Ltd’s shares have rebounded 27% from their 52-week low of 106 on 4 September. What explains the rally in the past week?

Analysts point to improving sales in China as the key trigger for investor optimism. Subsidiary Jaguar Land Rover Ltd’s (JLR’s) August retail sales were up 17% year-on-year, adding to a 4% increase in July. Two months of sunshine, after about two years of gloom and falling sales since June 2018, is good news. After all, China accounts for about one-fifth of the global sales of JLR.

But two months of sales improvement, that too in one region, is a bit much to cheer about. It is also too early to hope for a turnaround, amid continued turbulence in the industry, globally. A couple of days ago, Bloomberg reported that Chinese auto sales dropped for the 14th time in 15 months.

Sales in other regions, including the UK, North America and Europe, that were improving over the last few months, turned south. Total retail sales of JLR in August contracted by 6.7% year-on-year, while year-till-date sales were down 8%. Meanwhile, the uncertainty around Brexit continues, even as demand in Europe and North America is lacklustre.

(Graphic: Naveen Kumar Saini/Mint)
(Graphic: Naveen Kumar Saini/Mint)

On top of this, performance of the domestic business has deteriorated further, with medium and heavy commercial vehicle sales plunging 52% in August. Most industry experts say that even with government intervention, the sector is unlikely to recover for at least 12-18 months.

Weak sales and capacity utilization have been translating into negative operating leverage. As a result, profit margins are expected to remain under pressure.

JLR, whose Ebit (earnings before interest and tax) margins stood at a negative 5.5% in the June quarter, is worse off. In fact, analysts are still doubtful of the company achieving the management guidance of 3-4% Ebit margin for FY20, given the high losses in Q1.

Meanwhile, Tata Motors’ biggest concern—mounting net automotive debt of 46,500 crore at the end of Q1—is unlikely to ebb soon. The rating downgrades of its debt instruments reiterate the same in their rationale.

An Edelweiss Securities Ltd report following the June quarter results sums up the multiple headwinds for Tata Motors: “JLR profitability is affected by the slowdown in China. Brexit uncertainty could further add pressure. The outlook for India business is also hazy both on margin and volumes. That said, strong focus on cost control and cash flows is encouraging."

Needless to say, cost-control measures can only go so far in propping up profits. Only sustained improvement in sales across various markets will help turn the tide for Tata Motors.

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