Tata Motors: Interest costs drag profit

Stock likely to remain range-bound in coming quarters, as volumes are likely to pick up in second half of FY15

 

A sharp rise in non-operating expenses and a Rs 817-crore loss in domestic business hit Tata Motors' net profit for the quarter ended March. The company’s net profit fell 0.6 per cent year-on-year to Rs 3,920 crore. The Street was expecting a net profit of Rs 4,800 crore.

The sharp deviation is due to a sharp rise in non-operating expenses. During the quarter, finance costs rose 72 per cent year-on-year and six per cent quarter-on-quarter, while depreciation expenses rose 33 per cent year-on-year and 10 per cent on a sequential basis.

During the March quarter, consolidated sales rose 16.6 per cent to Rs 65,317 crore, which, too, was below the Street's estimate of Rs 67,650 crore. On the operating front, subsidiary Jaguar Land Rover (JLR) did not throw up any disappointment; this prevented any negative surprise on the operating front. JLR reported an operating margin of 17.2 per cent, 40 basis points lower than in the previous quarter. During the quarter, JLR's volumes grew four per cent year-on-year to 121,000 units.

Analysts aren't concerned, as JLR's volumes have been hit by capacity constraints, which are expected to ease in the second half of FY15. Surjit Arora of Prabhudas Lilladher expects JLR to report volume growth of 12-13 per cent in FY15. However, this will be back-ended, as capacity constraints will take time to ease. In the first half of this financial year, he expects JLR to report volume growth of five-six per cent. Analysts also expect JLR to launch new models in the second half.

While JLR will continue to drive Tata Motors' profitability and growth, the domestic business is expected to remain a drag for at least a couple of quarters. The domestic business reported volumes of 130,337 units, a fall of 36 per cent year-on-year and 14 per cent quarter-on-quarter. A fall of 25 per cent in the commercial vehicles sector and about 30 per cent in Tata Motors' volumes hurt the company's operating leverage. The company's loss in domestic business was significantly higher than the Rs 312-crore loss in the corresponding quarter last year.

Analysts expect the stock to remain range-bound in the first half of FY15, as there are no immediate catalysts for growth. While JLR's volume growth will be in single digits, the domestic business will continue to report heavy quarterly losses till the commercial vehicle cycle improves. The company might see an improvement in the second half of FY15, once JLR volumes pick up and the domestic business shows signs of a revival.