While the recovery in sales volume is positive for Tata Motors, the gains are priced in
For the first time since taking over Jaguar Land Rover (JLR) in June last year, Tata Motors returned to profitability at the consolidated level. For the September quarter, the company made a net profit of Rs 22 crore thanks to the turnaround in domestic sales of its medium and heavy commercial vehicles (M&HCVs) and a stabilisation of sales and cost cutting measures at JLR. While this is better than the losses that the consolidated entity has been reporting (Rs 329 crore in the June quarter 2009 and Rs 942 crore in the September quarter of 2008), consistent revenue growth and profits going forward will hinge on how quickly it improves sales volume at JLR and its ability to cut costs.
VOLUMES: A mixed bag
While the sales volume at JLR is still sluggish due to the slow economic recovery in Europe and the US, the numbers in India are looking much better. Following a 34 per cent y-o-y growth in vehicle sales in October 2009, in November, the company sold over 54,000 vehicles, up 65 per cent on a low base last year. On a sequential basis, while overall volumes were flat over October (up 1.3 per cent) on lower LCV and utility vehicle sales, M&HCV continued their good showing with a 4.4 per cent growth.
The US and European markets saw a sequential drop of 10 per cent and 18 per cent, respectively in the September quarter. Going forward, JLR’s volumes would depend to a large extent on the successful launch of the new Jaguar XJ car and stronger demand from the US and Europe (except Russia) which accounts for half of its worldwide sales. Costs are another area the company needs to keep a tight leash on if it is to sustain its profitability at the operating level.
| SLOW PROGRESS | |||
| in Rs crore | FY09 | FY10E | FY11E |
| Sales | 70,938 | 80,952 | 98,128 |
| Ebida | 8,796 | 2,510 | 7,261 |
| Net profit | -2,505 | -572 | 1,031 |
| P/E (x) | – | – | 38.2 |
| E: Estimates Source: IIFL, Consolidated numbers | |||
COSTS: Going down?
In addition to the improving volumes, better model mix (high margin products such as Land Rover 2010 models) and lower marketing costs (the company saved about 30 million pounds sequentially) helped JLR report an operating profit. As against a loss of 34 million pounds for the June quarter, the company reported an operating profit of 41 million pounds in September quarter. The company plans to further bring down material and design costs, marketing and other overhead expenses.
Analysts, however, say that unless sales scale up fast – the company sold 1.88 lakh units in the last twelve months till September, peak sales in 2007 stood close to 3 lakh units – it will be hard pressed to overcome a cash burn (requirement) of 400 million pounds of R&D expenditure and 250 million pounds of capital expenditure every year.
Slow road to profits
The high cost base and cash burn coupled with tough competition might mean that JLR could see profits only towards the end of 2010-11 or early 2011-12. While working capital loans have been tied up and there is no problem in terms of funding operations in the short term, net profits for the consolidated entity will continue to be under pressure due to JLR. Considering that the return to profits at its UK-subsidiary is at least a year away, consolidated debt (of auto business) at about Rs 23,000 crore and volume improvement gains priced in (the stock is up 30 per cent over the last one month), there is little upside expected from these levels in the short to medium term.
