While standalone operations are under pressure, JLR helps drive performance on the back of robust volumes in emerging markets.
The Jaguar Land Rover (JLR) acquisition, once regarded by sceptical analysts as whimsical at best, if not outright ill-advised, proved the silver lining for Tata Motors’ consolidated financials for the September quarter, and the key to future outlook. This was was underlined by the fact that JLR contributes 59 per cent of consolidated top line revenue and 76 per cent of profits for Tata Motors today.
Consolidated revenue increased 26 per cent year-on-year and eight per cent sequentially, bolstered by strong JLR volumes and robust light commercial vehicle (LCV) sales domestically. Ebitda (earnings before interest, taxes, depreciation and amortisation) margins slipped 17 basis points sequentially, impacted by significant pressures in standalone operations, while net profit fell 15.5 per cent year-on-year and six per cent sequentially. This included a Rs 439 crore notional mark-to-market (MTM, writing down assets to reflect current values) hit on foreign currency-denominated debt.
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Beyond strong year-on-year volume growth reported this quarter for JLR of about 23 per cent for wholesale and 16 per cent retail, analysts are banking on positive commentary by the management on the growth momentum. This is especially for the two marquee brands in newer markets like China and Russia. China retail volumes grew 87 per cent year-on-year and contributed about 16 per cent to total JLR volumes (up from under 10 per cent last year), while Russia grew by six per cent. Going ahead, this boost is expected to offset a softer demand outlook in developed economies (US, Europe), especially due to strong interest in the recently launched Range Rover Evoque, to be retailed in China from this month.
On the whole, JLR’s performance is also expected to counter some of the pressure seen in the standalone operations. In this scenario, many analysts are positive on the stock, which moved up 1.8 per cent post results against a 1.4 per cent fall in the broader BSE Sensex. At Rs 181.60, it is trading at about 7 times FY12 and 6 times FY13 EPS estimates, reflecting a lowered standalone estimates and expectations of strong volumes but slightly lower margins for JLR.
TROUBLE AT HOME
The tough domestic environment was reflected in weak car sales in the September quarter, down 28 per cent year-on-year, and muted medium and heavy commercial vehicle volumes, up just eight per cent year-on-year. Management highlighted that the domestic passenger car market shrank by 1.3 per cent in the first half of 2011-12, with most of the (about 8.7 per cent) fall coming in the quarter. In contrast and in line with expectations, LCV volumes continued to be extremely robust, at nearly 32 per cent year-on-year. However, it was the weaker than expected standalone operating margin performance that caught analysts by surprise, given expectations of a stabilising of key input costs.
Standalone Ebitda margins sank 119 basis points sequentially, settling at 7.2 per cent, close to 2008-09 lows and substantially lower than the 11 per cent averaged between 2003-04 and 2010-11, according to analysts at IIFL Research. Higher raw material costs were the main cause, but the margins also reflected the impact of lower volumes and top line growth, besides an increase in staff expenses (up 17.5 per cent sequentially).
Other reasons for the weak performance included withdrawal of value-added tax incentives in Maharashtra, as well as marketing and distribution expenses in the passenger vehicle business, including higher discounts for cars, according to Emkay Research. The management said it expected margins to remain under pressure in the near term. Adjusted for exceptional costs of Rs 294 crore MTM losses on foreign currency debt, the net profit was marginally lower, sequentially.
SMOOTH RIDE FOR JLR
JLR, on the other hand, surprised positively, with Ebitda margins declining by just 15 basis points sequentially to 14.9 per cent, in spite of costs for the Evoque launch. While revenue grew eight per cent, net profit grew 8.5 per cent sequentially to £238 million, even after accounting for a MTM revaluation hit on forex options and commodity hedges of £94 mn. By way of outlook, the management stated it would endeavour to protect margins, if exchange rates remained at current levels. A Bank of America-Merrill Lynch report, however, highlighted that while raising volume expectation, it would prune margin assumptions based on an expected product mix shift to Evoque, besides forex fluctuations. The research house estimates JLR’s volumes to grow 21 per cent in 2011-12 and 11.5 per cent in 2012-13.
Meanwhile, the company reported a net automotive debt (excluding vehicle financing business) to equity ratio of 0.7 and raised $500 million in external commercial borrowing on its standalone balance-sheet in September. It continues the exercise to extend debt profile and reprice high-cost loans. “Management is attempting to dollarise debt, replacing high-cost rupee debt with lower-cost forex debt,” note Citigroup’s analyst. This should help lower interest expense.
