Tata Motors: Margin, volume concerns can cap upside

While adjusted profits are above Street estimates, there no clarity over the sharp drop in JLR margins on a sequential basis

Buoyed by emerging market sales at Jaguar Land Rover (JLR) and a one-off deferred tax credit, Tata Motors’ consolidated profit for the March quarter surged 136 per cent y-o-y to Rs 6,234 crore. Adjusted for deferred taxes, profits jumped 70 per cent to Rs 4,500 crore, higher than the Rs 4,270-crore estimates. Aided by a 29 per cent rise in JLR volumes, consolidated sales, at Rs 50,000 crore, were also up 44 per cent. The management indicated that JLR will increase R&D and product development in FY13 to £2 billion (Rs 16,000 crore) from £1.5 billion in FY12. This is likely to constrain its cash flows for FY13. The disappointment, however, is that JLR’s Ebitda margins have fallen to 14.6 per cent in the March quarter from 17 per cent in the December quarter. Analysts are still not clear on the reasons for the same, saying it could be due to the lower average selling prices (higher discounts) and a change in product mix. Though seasonality has a role, if the trend persists it would be difficult for JLR to report consensus FY13 Ebidta margins of 17-18 per cent.

On the operational front, after a strong show in March, JLR sales dropped more than expected in April (down 31 per cent over March) due to seasonality and discount offers by rivals.

While the sale of domestic commercial vehicles, especially medium and heavy ones, were hit due to competitive pressures, a rush to buy vehicles in March threw a spanner in car volumes. Due to less-than-expected performance, the Tata Motors’ scrip, which jumped 50 per cent at the start of the year, has seen some weakness this month, mainly on weak JLR volumes, and is hovering around Rs 275.

Driven by Evoque/Land Rover sales, analysts have pegged FY13 volume to grow 16-20 per cent to 360,000 units. A positive trend for the company is the rising share of the Chinese market.

Given that JLR accounts for 90 per cent of the consolidated profit, the Street will look out for its sales progress in the coming months. While there is no indication yet of a slowdown in luxury car sales in China, if there is a moderation or the Euro zone crisis snowballs into a broader slowdown, overall sales could be hurt.