Tata Motors posts Rs 4,450 cr loss in June qtr as chip shortage takes toll

The company's UK subsidiary expects Q2 to be worse, sees recovery only in the second half of FY22

Tata Motors' consolidated net losses for the June quarter narrowed year-on-year as well as quarter-on- quarter but lagged Street estimates, as a severe chip shortage dented volumes and singed earnings. Higher product development charges and an exceptional tax change with net tax incidence at Rs 1,742 crore for the quarter also weighed on the results, taking investors by surprise.

The owner of Jaguar Land Rover Automotive Plc saw the net loss for the quarter come down to Rs 4,450.92 crore from Rs 8,443.98 crore a year ago, the company said in a regulatory filing. This is the second straight quarter of losses for the company. A Bloomberg poll of 11 brokerages had pegged the net loss at Rs 2,098.80 crore. Net sales during the quarter rose 107.6 per cent year-on-year to Rs 66,406.05 crore but was down 25.1 per cent quarter-on-quarter.

“Tata Motors’ performance was below our estimates on the operational front,” said an ICICI Direct analyst in a note after the earnings. EBITDA margins at JLR stood at 9 per cent versus the brokerage’s estimate of 10.5 per cent, while consolidated margins came in at 11 per cent versus its estimates of 12.3 per cent. “High tax outgo of Rs 1,823 crore in JLR despite PBT loss impacted consolidated profitability,” he wrote in the note.

Overall retail sales at the company's UK subsidiary in the first quarter rose 68.1 per cent year-on-year to 124,537 vehicles, as sales recovered from the impact of the pandemic. Global wholesales declined to 213,600 in the June quarter from 334,200 units in the March quarter. Had it not been for the semiconductor shortages, wholesale sales would have been up by 30,000 units.

“It was a tough quarter for us in every aspect. The second quarter is expected to be worse and things should improve thereafter,” P B Balaji, Chief Financial Officer, Tata Motors, told reporters in a post earnings conference call.  The company is doing everything possible to tide over the shortage of semiconductors, he added. He expects JLR’s wholesale volumes to be 65,000 units, 50 per cent lower than the original plan.

Meanwhile the India operations showed significant improvement as compared to Q1 a year ago, but the second Covid wave, coupled with the supply issues, slowed down the growth momentum sequentially. Net sales at the entity rose to Rs 11,904 crore from Rs 2,686 crore. But the numbers are not comparable owing to the lockdown in Q1 of FY21. Tata Motors reported net sales of Rs 20,045.90 crore in the fourth quarter of FY21.

The standalone entity reported an Ebit of 6.2 per cent and pre-tax loss of Rs 1,300 crore for Q1FY22. The PV business is on track with its turnaround plans, and is likely to see cash breakeven by FY23, Balaji said. The subsidiarisation of the business is set to take effect in the weeks aheaf after National Company Law Tribunal pronounces its verdict, said Balaji.

Even as the demand remains strong for both India business and JLR, the pandemic, persistent inflation and supply chain issues remain the top worry. JLR has a record order bank of 110,000 units, Balaji said. Due to the chip shortage, inventory at JLR dealers are at an all time low, he said.

In June, the UK subsidiary issued a profit warning guiding for a negative free cash flow (FCF) outflow of a billion pound and its impact on volumes for the first and second quarter due to the deepening shortage of semiconductors. JLR expects the supply bottleneck situation to improve in the second half of FY22 with a positive Ebit margin and FCF generation. Ebit margins in the second quarter of FY22 are expected to be negative.

Notwithstanding a subdued performance and a guidance of greater pain ahead in the September quarter, analysts remain confident of the long term prospect. Mitul Shah, Head of Research at Reliance Securities said that a lower capex and government’s stimulus would support JLR, while an improving PV business and focus on cost control would help Tata Motors’ standalone margin. Moreover, tight control on capex and R&D would lower its automotive debt to greater extent over the next 2-3 years, added Shah.

“In view of ongoing revival of JLR’s global business and restructuring of domestic business coupled with attractive valuation, we maintain a positive view on the stock, and we have BUY rating on TTMT with a two-year target price of Rs 250,” he said.