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Photo: Reuters
Photo: Reuters

Tata Motors’ earnings at risk as virus aggravates JLR’s China woes

  • Coronavirus has jeopardized JLR sales in China, its largest market accounting for 23% of sales
  • Disruption in car sales, supply-chain issues, exchange rate volatility to hurt Tata Motors’ financials

The China factor is yet again proving unlucky for Tata Motors Ltd. The parent of Jaguar Land Rover Ltd (JLR) saw its stock fall 16% since December when news of the coronavirus outbreak in China made headlines.

The epidemic has slowed economic activity in the region. Auto sales in China fell 22% year-on-year in January and are expected to drop 30% this month. This will have far-reaching implications on the sales and profits of Tata Motors’ prized subsidiary JLR.

The Guardian newspaper reported JLR’s chief executive officer (CEO) Ralph Speth as saying that the company has halted sales operations in China, which accounts for about 23% of its total sales.

Unfortunately, the timing is bad too. It is barely five months since the automaker’s sales in China began to recover after the precipitous fall in the region for about 12-15 months.

Graphic by Sarvesh Kumar Sharma/Mint
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Graphic by Sarvesh Kumar Sharma/Mint

In fact, December quarter (Q3 FY20) results showed that China was once again favouring JLR’s fortunes with a 24.3% year-on-year sales growth.

Worse, JLR has extended the shutdown at its manufacturing plant in China.

That apart, the luxury carmaker is faced with uncertainties on supply of auto components from the region. “JLR has warned it could run out of car parts at its British factories at the end of next week, as the coronavirus halts supplies from China," said The Guardian report.

In a nutshell, the sales disruption, supply-chain issues and exchange rate volatility would hurt JLR’s financials too.

Jigar Shah, CEO of Maybank Kim Eng Securities India Pvt. Ltd said, “The situation is now fluid. Airlifting of parts will increase costs and reduction on production is more negative. This is showing up in the stock price though it is a temporary situation."

To be sure, these factors are risks to near-term revenue and profit growth of JLR. Note that the luxury carmaker was being deftly steered back on the fast track by the management’s initiative of Project Charge and Project Accelerate.

JLR’s Ebit (earnings before interest and tax) margin swung into the positive zone to 3.3% in Q3 from -2.5% in the year-ago period. So, despite losses in the domestic commercial vehicle business, Tata Motors’ consolidated net profit of 1,756 crore last quarter marked a comeback in fortunes.

The 60% rally in Tata Motors’ shares from the 52-week low in September reiterated investor faith in the company. However, it was short-lived. The JLR management stated that it may never recoup sales lost to the coronavirus outbreak.

China has been a spanner in the works for JLR. In the recent past, there were problems with product portfolio, dealer network, plummeting sales, rising inventory and even a fire at the Tianjin port.

So, it appears that the China factor will continue to haunt Tata Motors’ performance for some time to come.

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