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A sub-par September quarter performance coupled with higher scrutiny by the Securities and Exchange Board of India (Sebi) of Tata firms led to a near 10% fall in Tata Motors’ stock on Tuesday. Though the company’s revenues were in line, its operating and net profits were below expectations. JLR, which contributes about 85% of revenues and 95% of operating profits, saw its operating profit margins come in at 10.3%. Adjusted for forex revaluation and one-time costs, margins stood at 12.3%, which is 74 basis points lower than the year-ago quarter and below analysts’ expectations. Despite a lower tax rate at JLR, adjusted net profit was also below expectations at £342 million.
A weak show in the India business led by muted medium and heavy commercial (M&HCV) volumes added to the woes. The continued discounting in M&HCV aggravated the weak demand scenario in the industry. Lower share from this segment and higher raw material costs also saw the India business margin coming below expectations, at three%. This, coupled with lower other income, led to a ~660-crore loss versus analysts’ expectations of a ~165-crore loss.
The management believes that M&HCV volumes would increase in the second half of the financial year due to increased infrastructure spending and favourable impact of the monsoon. What could push up this number is the pre-buying expected before the adoption of BS-IV norms. The company is eyeing a higher share of the heavy tonnage segment from the current 55% to about 60%. There is some respite visible in October with a rebound in M&HCV sales (up 17% year-on-year versus 13% fall in the September quarter). Tata Motors, however, underperformed with volume growth of nine%, while smaller peer Ashok Leyland outperformed with a 40% growth.
On the passenger vehicles side, growth is driven by higher sales from Tiago. A strong launch line-up over the next one year should keep its volume growth strong.
What the Street will be looking at more keenly are JLR volumes. Like the standalone business, JLR’s pipeline over the next year-and-a-half is strong.
While JLR’s sales in October were led by China (up 38.5%) and Europe (24.5%), new launches and the current portfolio are expected to improve sales in North America and the UK.
Analysts believe valuations for a business with strong prospects is attractive — nine times FY18 estimates versus Maruti’s 20-22 times.
