Things seem to be going from bad to worse for Tata Motors Ltd. Plunging sales across global markets, mounting losses, increasing capital expenses and heavy debt, along with a series of rating downgrades, have doused investor hopes of an improvement in FY20. While its subsidiary Jaguar Land Rover Ltd’s woes are well known, the fact that the stand-alone business reported net loss in the June quarter came as a double-whammy.

The company’s net consolidated loss of 3,679.7 crore doubled from the year-ago period, and was twice the amount estimated by the Street. It was largely the cascading effect of negative operating leverage, as overall sales volumes dropped 21% year-on-year (yoy). Net revenue fell by 7.7% to 61,467.3 crore, which beat estimates. Rising costs in a declining and highly competitive auto market dragged Ebitda margin down by 130 bps to 6.2% on a consolidated basis.

The pertinent question now is what lies ahead for the company.

Mitul Shah, vice-president research, Reliance Securities Ltd, said: “The results were highly disappointing. Earnings downgrade will continue, as in addition to the company’s woes, we expect tough business environment for the luxury car industry in global markets to continue for the next 1-1.5 years."

To be sure, there are several concerns before investors and analysts. JLR’s June quarter sales break-up is still not very encouraging, even though the management reiterated that things are improving. In China, JLR’s sales dropped 29% y-o-y, steeper than the industry drop of 14%. The same is true for Europe and some other overseas markets. Recent analysts’ reports brought up issues of higher warranty costs, which imply product quality issues came back to haunt the company.

Even so, JLR’s loss before interest and tax, amounting to 2.5% of revenues, came as a surprise. The guidance of 3-4% Ebit margin for FY20 looks like a distant dream in that backdrop.

Another concern is the deepening auto slowdown in the domestic market. Heavy commercial vehicle sales dropped 30% y-o-y, even as overall sales of stand-alone operations fell by 22%. Again, stiff competition and poor scale of operations dragged Ebit margins down by 330 basis points (bps) to 0.8%. At this juncture, a recovery looks distant and the industry has pinned hopes on lower taxes and a policy announcement on vehicle scrappage to improve sales.

That is not all. The biggest concern was Tata Motors’ mounting net automotive debt, which was up at 46,500 crore at the end of the quarter. Recently, Fitch Ratings had downgraded the company’s debt, which isn’t surprising given the performance. Analysts reckon that all these challenges will increase the cost of borrowing for Tata Motors, which could impact cash flows and profits in the final run.

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