India's biggest truck and bus maker Tata Motors forecast slower demand at home would hit sales of its cars, as it posted first-quarter profit below estimates and said domestic business profit halved.
However Tata said a fall in operating margin at its popular Jaguar Land Rover (JLR) unit had slowed, raising hopes that China and European economies, although stuttering, would continue to drive demand for luxury Jaguar saloons and sporty Land Rover cars.
JLR, which Tata bought for $2.3 billion in 2008, has helped offset slowing sales of Tata's own branded cars and trucks in India, where cooling economic growth and high interest rates have hurt business.
Tata Motors vehicle sales fell 3.6 percent to 190,483, the company said. The India business profit nearly halved to 2.1 billion rupees.
"Slower industrial growth and a weak economic outlook will impact the overall demand going forward," said chief financial officer C. Ramakrishnan. "Competitive intensity poses a significant challenge to the passenger vehicle industry."
India reported on Thursday its industrial output fell for the third time in four months in June, putting pressure on the government to pull Asia's third-largest economy from its worst slowdown in almost a decade.
However Tata said it expected growth in China would continue to boost JLR, where the fall in operating margin was modest -- to 14.5 percent from 14.6 percent, unlike the previous quarter's slide from 20.1 percent.
JLR sold 83,452 vehicles during the first quarter, 34.4 percent more than in the previous year. China, now its biggest market, accounted for 22.2 percent of the total volume in the quarter, up from 15.7 percent in the same period last year.
"This was expected to be a bad quarter for them,"said Ashish Nigam, auto analyst at Antique Stockbroking in Mumbai. "There were fears that the JLR margin would be even worse, given the tough situation in China and Europe."
Like some rivals, Tata Motors too was forced to shut down two of its factories, for two three-day periods in June in order to balance production with demand.
Tata, part of the $83 billion Tata Group conglomerate, said net profit for the quarter ended in June was 22.45 billion rupees, up 12.3 percent from a year previously, with revenue up 30.1 percent at 433.2 billion rupees.
Analysts, on average, expected net profit of 27.61 billion rupees on revenue of 429.40 billion rupees, according to Thomson Reuters I/B/E/S.
Shares in Tata Motors dropped as much as 4 percent after the results, but later recouped some of its losses to end the day down nearly 1 percent, while the main index fell 0.2 percent.
The company said profit in the quarter ended June was also affected by foreign exchange losses. JLR accounted for about 91 percent of the carmaker's combined profit in the quarter.
Much of Tata's future growth depends on JLR's continued success in China, which accounted for 17.3 percent of the luxury brand's sales in the year that ended in March, but where car sales growth is moderating.
"China is strong, especially strong for the luxury market," said Ralf Speth, chief executive of JLR. "We have a very low market share in China ...therefore we are sure we can continue this growth."
The operating margin at its domestic business, under pressure from rising competition and falling demand on high interest rates and a recent excise tax hike, stood at 7.3 percent during the quarter, down from 8.8 percent a year ago.
An Indian automobile industry body last month lowered the forecast for car sales growth for the current fiscal year to rise 9-11 percent, compared to the 10-12 percent growth it had forecast in April.
(Writing by Sumeet Chatterjee; Editing by Muralikumar Anantharaman and Sophie Walker)