Tata Motors: Home alone won't do

Business is brisk in the home market but concerns about Jaguar and Land Rover remain.

India’s biggest auto company Tata Motors is now on a much firmer ground in its home market and seems to have regained pricing power. Tata Motors took a couple of price increases and as a result has managed to earn better per unit realisation on its vehicles. This has helped it post a strong operating profit margin (opm) in the September quarter.

While revenues were up 13.2 per cent driven by a 12 per cent growth in volumes, the opm increased 200 basis points sequentially to 13.4 per cent. The better top line apart, the company has efficiently managed its inventories and raw materials purchases. In the September quarter, raw material costs, as a percentage of sales, came off by 120 basis points over the June 2009 quarter.

 

The company has been talking of cost-cutting initiatives and it has clearly delivered on this front. Not surprisingly, the stock closed up 1.6 per cent at Rs 548 on Tuesday in an otherwise weak market which lost 2.3 per cent. Of course, the stock has retreated from its 52-weak high of Rs 621 that it hit on September 22 this year.

While the company is now out of the trough as far as the home market is concerned, it is the consolidated balance sheet, which includes the financials of Jaguar and Land Rover (JLR), that makes the Street cautious. The JLR business, located in the UK, posted a loss of £64 million in the June 2009 quarter on revenues of £1.1 billion. It could be while before JLR starts making money, though losses for the June 2009 quarter were about half of what was reported in the March 2009 quarter.

What helped was mainly lower expenses on marketing overheads and raw material costs, but that could change now as prices of both steel and aluminium have started firming up. JLR’s dealer volumes in the June quarter dropped 52 per cent year-on-year implying that while the global economy may be on the mend, demand for expensive cars may take a while to revive.

Nevertheless, a slew of cost-cutting measures is expected to help JLR break even possibly in 2010-11. Losses this year are expected to be restricted to £200 million, far lower than the £307 million posted in 2008-09. Thus, Tata Motors is expected to post consolidated losses of around Rs 1,000 crore in the current year on estimated revenues of Rs 75,000 crore, less than half the loss of Rs 2,276 crore reported in 2008-09. Unless JLR posts some good numbers for the September quarter, the stock may consolidate around current levels.