Tata Motors: JLR operating margin jumps 200 bps in Q1

Analysts rule out any earnings upgrade till volumes pick up

Tata Motors continues to be a tale of two companies moving in different directions. As Jaguar Land Rover (JLR) grows from strength to strength, there is no end to declines in the domestic business. Even in the June quarter, the domestic business continues to drag the headline numbers of the company. As a result, the market tracks JLR's performance more closely than the domestic business.

Almost every quarter, JLR has provided solace to the market with its exceptional performance. The first quarter of FY14 was no different. The company's profitability and top line were driven by JLR. A revenue growth of 12.6 per cent at JLR helped the consolidated business report a sales growth of eight per cent. JLR's operating margin expanded by 200 basis points to 16.5 per cent in the first quarter on higher realisations.

Average realisations were up 3.7 per cent, year-on-year, and 4.1 per cent, quarter-on-quarter. The company says sales momentum in FY14 is being driven by the new Range Rover, Jaguar XF Sportbrake and F-TYPE, and the new Range Rover Sport. During the quarter, wholesale volumes grew by 8.6 per cent to 90,620 units and retail volumes grew 10.4 per cent to 94,719 units. Despite the JLR's margin beat, Emkay Global's Kaushal Maroo says the stock is likely to be range-bound at Rs 290 levels in the near term till JLR shows an improvement in volumes. Given the historical volatility in JLR's operating margins, there's little expectation of any upgrade to consensus earnings estimates.

The standalone business continues to slide. Despite refreshing its product portfolio in the passenger segment and rollout of a customer programme called Horizonext during the quarter, Tata Motors has failed to prevent volumes from falling in the domestic market. In the June quarter, the company's domestic volume (commercial and passenger vehicles) declined 19 per cent to 154,352 units.

Compared to the corresponding period in the last financial year, revenues of the standalone business declined 14 per cent to Rs 9,105 crore, while operating profit fell 74 per cent to Rs 207 crore. Operating margins were down to 2.3 per cent from 7.3 per cent. Even though consumption of raw materials as a percentage of sales declined 190 basis points to 72.6 per cent, it was offset by higher other expenses to sales, which increased 90 basis points to 17 per cent. Staff costs, too, increased during the quarter.

Mihir Jhaveri, director (institutional research) at Religare Capital Markets, says: "Adjusting for the other income, standalone loss stood at Rs 700 crore."