Tata Motors: On the road to recovery

With loans for JLR coming through and CV sales gaining momentum, the outlook is improving.

The Tata Motors stock was up 5 per cent on Thursday with the Street relieved that the auto major has closed out a £175 million (Rs 1,300 crore) line of credit from State Bank of India. The funds will be used to run the Jaguar and Land Rover (JLR) business in the UK, which posted a loss of £64 million in the June 2009 quarter on revenues of £1.1 billion.

It could be a while before JLR business turns around. But serious cost-cutting measures, including trimming the workforce, imposing a wage freeze and sourcing components from markets that offer cheaper alternatives, ensured that losses for the June 2009 quarter were about half the amount posted in the March 2009 quarter. What helped was mainly lower expenses on marketing overheads and raw material costs but analysts were expecting the raw-materials bill to be even smaller given the sharp drop in prices of steel and aluminium.

Also, with demand in the key US and European markets still sluggish, sales were subdued with dealer volumes falling 52 per cent year-on-year while retail volumes were lower by 35 per cent year-on-year. On a sequential basis though, the numbers were more reassuring. In the meanwhile, the rationalisation measures initiated — including the closure of one of its plants in the Midlands — should help JLR break even in 2010-11 with losses being contained at £200 million this year compared with a loss of £307 million in 2008-09.

With the recovery in the commercial vehicles (CV) sector in the home market gaining momentum, Tata Motors is expected to report revenues of Rs 7,700 crore for the September 2009 quarter, an increase of 9 per cent year-on-year. A smaller raw-materials bill is expected to result in a strong operating profit margin of 12 per cent (11.4 per cent in the June 2009 quarter) leading to a 65 per cent rise in the operating profit.

The rise at the net profit level however would be modest at 27 per cent because of high interest costs. Tata Motor’s consolidated revenues for 2009-10 are expected to come in at around Rs 75,000 crore while the losses are expected to be lower at just under Rs 1,000 crore compared with Rs 2,276 crore in 2008-09. The stock has had a strong run gaining nearly 30 per cent since August, compared with a move of 6 per cent for the Sensex. But at Rs 587, all near-term upsides appear to be priced in.