Tata Motors in a rut as JLR’s operating margins plunge

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As if ringing the alarm bells for weak results, Tata Motors Ltd (TML) shares fell by 3.2% on Wednesday even as the firm announced its June quarter results after markets closed. The media release says it all. Tata Motors managing director and CEO, Guenter Butschek said, “While the first quarter results have not met our expectations, we are working with renewed focus and energy to improve performance of our commercial and passenger vehicle businesses.”

A tough environment both in domestic and international markets along with foreign exchange hedges that turned unfavourable led to weak revenue ramp-up and plunging profits that came way below forecasts.

Consolidated revenue fell by 10% to Rs58,651 crore on poor sales ramp-up in its UK subsidiary and cash cow, Jaguar Land Rover Plc, coupled with weaker performance in the domestic commercial vehicle market.

Indeed, Tata Motors’s weakness in medium and heavy commercial vehicles where it is steadily losing share to the No.2 player, Ashok Leyland Ltd, is not surprising, given its poor focus on product portfolio.

The quarter’s performance was further marred by the transition to the goods and services tax (GST), which impacted retail sales across sectors in the country. Hence operating margin in domestic operations was less one percent, down from 6.45%.

However, what was appalling was JLR’s paltry 4.6% growth in revenue. Adding up to the negatives were higher raw material and marketing costs, especially in the US markets. The share of China and US did rise in JLR’s sales volumes, but there was pressure in regions like UK, Europe and other emerging markets.

Besides, the firm took a huge £454 million hit on account of foreign exchange hedges.

All these dragged JLR’s operating profit down by 34.2% year-on-year. The operating margin fell 460 basis points (bps)—to a mere 7.6%.

Hence, consolidated operating margin was 9.9%, including other operating income. This was not only a huge come down from 15.2% in the year-ago period, it was also 100 bps below Bloomberg’s estimate. Net profit of Rs3,182 crore included a one-time gain from credit of Rs3,609 crore on account of “defined benefit pension plans”. Even the profit before tax (excluding this gain) was a deplorable Rs117 crore from Rs2,061 crore a year ago.

Worse still, the skies are far from blue for Tata Motors in the near term. Huge marketing expenses may be needed to get back on track in the domestic CV market. Meanwhile, the management clearly spelt out, in the analysts’ call, that barring China and the US, the challenges to sales growth are likely to remain for some time in other regions.

What hangs like Damocles’ sword on profits in FY2018 and perhaps some part of FY2019 as well, would be the losses on account of its unfavourable foreign exchange hedges.

No doubt there are optimists who believe that JLR’s diverse product portfolio and geographic presence should see another round of sales ramp up and profit growth. But that would be several quarters away. No wonder then, Tata Motors stock has skid in the last two quarters and turned an underperformer. At Rs416, it is almost at a 52-week low, with little fuel to fire it in the near term.

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