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Margin scare dents Tata Motors

Stocks plummeted nearly 10% closed at Rs 293.55

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stock today reacted negatively to the warning given by its highly profitable subsidiary Jaguar about a possible margin squeeze in the last concluded quarter.

Jaguar Land Rover (JLR) accounts for about 90% of the company's profits even Tata Motors' stand-alone business such as cars, trucks and buses, other ventures and subsidiaries struggle.

Tata Motors stock on Thursday plummeted nearly 10% on the Bombay Stock Exchange during initial trading hours before recovering and closing at Rs 293.55, down by 5.91%, compared to the previous day's close. Its NYSE-listed ADRs closed 9.88% down at $26.99 on Wednesday.

A statement released yesterday stated that there will be no increase in earnings before interest, tax, depreciation and amortisation (EBITDA) in the third quarter while EBITDA margins are expected to be lower compared to the earlier two quarters.

The news of expected margin downgrade comes despite the two brands clocking more retail sales during the reporting quarter than the previous two quarters. JLR saw sales of 88,658 units in the third quarter as against 84,749 units in the second quarter and 85,758 units in the first quarter.

"EBITDA is likely to be in the region of levels reported for the previous two quarters and EBITDA margin is likely to be slightly lower than in the previous two quarters, primarily reflecting less favorable exchange rates, the ongoing effect of a higher mix of Evoque sales and other factors", stated JLR.

The Range Rover Evoque, the highest selling model in the JLR line-up, now constitutes (as of December) about 30% of total JLR sales worldwide. The Evoque is followed by the Range Rover Sport.

Tata Motors has reportedly stepped up the pace of new product development including new powertrains and technologies as the pipeline of models developed by its erstwhile owner Ford Motor Company has exhausted.

The new slightly compact yet stylish SUV Evoque, which was launched in 2011, was one of the last all-new models started by Ford. Under Tata Motors' ownership JLR is yet to launch an all-new model. One of the first products, under Tata Motors, may hit market next year when a new small Jaguar is unveiled.

In addition, free cash flow (cash from operations after capital spending) will be negative in the quarter ended December 31; free cash flow will be positive in the first nine months of the fiscal year to date, JLR further added. The two brands continue to target funding most of its capital spending out of operating cash flow.

Despite the warning analysts, however, are recommending a buy on Tata Motors stock stating that the dip in margins is a one quarter effect and that margins will see an improvement in the final quarter.

"Currency was slightly against JLR in 3Q (third quarter) while market mix was fairly stable. This is why EBITDA margins will be slightly down in 3Q Vs 2Q (second quarter). Tata said that fourth quarter will be much better as the full effect of the new Range Rover comes through and there will be no volumes of the old Range Rover", a CLSA report stated.

"We see this as a one quarter effect and expect a sharp improvement in margins in 4Q as shipments of the new Range Rover ramp up. We recommend buying the stock in the event of a correction on this," the report further added.

Tata Motors total capital spending in the current financial year is expected to be in the region  of Pound 2 billion, however for the next financial year the spending could increase to Pound 2.75 billion as a result of increased costs on new products, engines, expansion in China and  new markets.

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