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Tata Motors disappoints as JLR performance below estimate

LiveMint logoLiveMint 29-05-2014 Vatsala Kamat

Tata Motors Ltd’s March quarter performance had little to cheer about. Net revenue and profit were below analysts’ expectation both for the domestic entity and its overseas subsidiary, Jaguar Land Rover Plc. Analysts expect the stock to react negatively in the near term.

Consolidated net profit at `3,918 crore, marginally below the year-ago level, was also 17% lower than Bloomberg’s analyst consensus. The 16.6% year-on-year (y-o-y) growth in net revenue and the 29% jump in operating profit were gobbled up by a 72% increase in finance costs and foreign exchange loss in the quarter, dragging net profit down. Still, operating margin was comfortable at 16.5%, up by about 160 basis points from a year ago.

JaguarLand Rover’s (JLR’s) performance was a bigger disappointment. Net profit grew at 19% from the year-ago period, paling in comparison to a 40% expectation on the Street. That said, operating margin improved by 100 basis points to 17.2% on better geographic mix, richer product mix and higher volumes driven largely by Chinese markets. China’s share in JLR’s revenue has increased from 20% to 24% while UK and Europe were stable.

However, JLR’s performance for the quarter is strictly not comparable with the year-ago period. Even the operating margin, following a change in accounting policy, includes a revaluation of current assets and liabilities and forex adjustments on commodity hedges. The adjusted operating margin is around 15.7%, below the year-ago period and consensus estimates.

A month ago, JLR reported an unimpressive 4% growth in sales volume during the March quarter. Investor sentiment had improved thereafter with April sales jumping by 40% from the year-ago period. If this continues, one may see analysts revising estimates for fiscal 2015.

Meanwhile, nothing has changed on home ground. Stand-alone operations posted dismal results with vehicle sales (commercial and passenger vehicles) plunging by 33% during the quarter from a year back. The company in its media release stated the poor economic environment weighed down on commercial vehicle sales throughout fiscal 2014—overall industry trucks sales fell by 25% while even the light commercial vehicle sales contracted by 21%. The industry has also been doling out discounts to push sales in vain, which in turn has kept average realisations low. The domestic entity, therefore, posted a loss of around `817 crore, close to that estimated by analysts.

Tata Motors boasts of a healthy balance sheet with strong free cash flows and net consolidated debt-to-equity ratio of 0.07.

The domestic entity’s performance will continue to drag down overall valuations. The stock’s current market price of `423.8 discounts the estimated one-year forward earning per share by around eight times. Although this is reasonable, a rally in the stock would be triggered only by improvement in the country’s economic milieu, which would gradually translate into higher demand for trucks and buses.

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