Tata Motors: JLR saves the day

Profitability of the domestic business collapses in Q2, JLR's dividend payout helps parent post a net profit of Rs 867 cr

Tata Motors is now an out-and-out Jaguar Land Rover show. The standalone business is proving a drag on consolidated numbers. The second quarter is a classic example of how Jaguar Land Rover (JLR) has come to the rescue of the parent company, paying a hefty dividend of Rs 1,312 crore. This has helped Tata Motors post a net profit of Rs 867 crore in the second quarter.

What is likely to worry the market is the decline in profitability of the standalone business. In the September quarter, volumes grew 5.8 per cent compared to the corresponding quarter in the previous year, but revenues declined 3.6 per cent to Rs 12,481 crore. An adverse product mix, competitive pressures and higher discounts on passenger cars resulted in lower realisations. This is also evident in the margin performance, both sequentially and annually. The operating margin for the standalone business declined from 6.6 per cent in the June quarter to 5.2 per cent in Q2. A year ago (Q2FY12), the company’s operating margin stood at 6.7 per cent. This trend is expected to continue in the coming quarters too, as competitive pressures in the Indian market are unlikely to abate, both in the passenger vehicles and commercial vehicles segments.

JLR’s performance in the quarter is in complete contrast to that of its parent. JLR’s volumes are up 14 per cent year-on-year (y-o-y) to 77,442 units in Q2. The company says the growth in volumes was driven by strong demand from China, which accounted for 21 per cent of the quarter’s sales. JLR’s Q2 revenues grew 13 per cent and operating margins expanded 40 basis points sequentially to 14.8 per cent. Analysts say that given the performance of the domestic business, the performance and monthly volumes of JLR will come under intense scrutiny. The average run rate for JLR has been 29,000 units a month, and any dip in this would be negative.

The divergent performance of Tata Motors’ domestic business and JLR operations has impacted consolidated margins, too. The consolidated margin in Q2 was down 100 basis points sequentially to 12.3 per cent, even as it stayed flat y-o-y. The only trigger that would push the stock price further would be an uptick in JLR’s performance after new products are launched.