Tata Motor Q3 Earnings Disappoints

Tata Motor, the Jaguar Land Rover (JLR) luxury car brand owner, fiscal third quarter to December 2019 earnings performance failed to meet analyst expectations. Disappointing show by JLR is largely responsible for the sub-optimal performance.

Apparently, Tata Motors’ share price declined 2% in early trade on January 31.

Although Tata Motor returned to profit during the October-December quarter, the fall in revenue raises concerns about the future earning prospects.

The company’s consolidated net profit for the quarter stood at Rs 1,738.30 crore against a loss of Rs 26,992.54 crs in the corresponding quarter of the previous financial year.

Consolidated revenue from operations stood at Rs 71,676.1 crore in Q3FY20, falling almost 7% on the year against Rs 76,915.94 crore in Q3FY19.

In commercial vehicle sales, domestic retails were higher by 16% (versus wholesales) and passenger vehicles domestic retail were higher by 35% (versus wholesales).

In Q3FY‘20 wholesales (including exports) decreased 24.6% to 1,29,185 units. In the domestic market, medium and heavy commercial vehicle (M&HCV) trucks de-grew 47.7%, intermediate and light commercial vehicle (ILCV) trucks de-grew 15.7%, small commercial vehicles (SCV) and pick-ups de-grew 6.1%, and commercial vehicle passenger vehicles de-grew by 25.6%. Domestic passenger vehicle volumes were down 26%.

The company’s operating performance bears strain from falling revenues amid discount offerings to expedite vehicle sales which face regulatory and business environment overhang.

JLR EBITDA of 20% and EBIT 34% indicates the above observations.

India’s business performance was weak as well, with EBITDA down 90% driven by PV segment.

The domestic business was impacted by the general economic slowdown. Its profitability was impacted by an adverse mix where despite increasing market shares, M&HCV volumes declined.

JLR’s revenue stood at £6.4 billion, up 3%.

In the Q3 Management concall the company stated that the volume drop in CVs was due to severe hit in its MHCV volumes in the domestic market due to macro factors and inventory reduction before the implementation of BS6.

However, the retail volumes were higher by 16% in the CV and 35% in PV as compared to reported wholesale numbers. Operating deleverage along with higher variable & marketing costs impacted its margin severely.

The management also stated that the near-term demand situation looks grim as post festive sales, the demand and consumer sentiments remain weak.

The volumes and margins are likely to only improve once economic activity picks up and in addition if consumer sentiments get some boost in the upcoming union budget.

Additionally, Tata Motors has launched all its PV BS6 range of products. The focus is on accelerating retails, launching new products in PV, and few more electric products launch expected.

The management expects some pre-buying in CVs from medium and large fleet owners as they get better total cost of ownership by replacing old BS3 models with new BS4, before price increase post BS6.

On the electric vehicle side, the company is a leader with 47% market in EV in Q3FY20.

The focus is to scale up demand in the fleet segment for Tigor EV and in the personal segment for Nexon EV. Developing an ecosystem for charging infrastructure, components, cost reduction and developing a new range of electric vehicles.

On JLR’s the company stated that its performance has seen a turnaround led by a recovery in JLR China and higher than expected benefits received from the Project Charge.

China volumes grew by 24%. In addition, its newly launched Defender has received an overwhelming response with good order booking.

The global sales for its RR Evoque was up by 30% for the quarter. LR Discovery Sport, RR Sport and LR Discovery supported the volumes.

Also, the project charge has delivered GBP 2.9bn of cash flow & cost improvement before the deadline.

The company has now launched Project Charge+ with a target to achieve GBP 1.1bn of savings more by the end of FY21 and it expects significant opportunity to lower its RM costs further.

During the call, the management also stated that it was concerned on the breakthrough of Coronavirus situation especially in China, which is not only impacting the demand situation but also disrupting the supply chain over there.

JLR has targeted EBIT Margin of 3% for FY20E, however looking at the developments globally, especially w.r.t. Coronavirus, we expect the margin achievement may take a long time ahead.

Meanwhile, the management has also targeted to improve its EBIT Margin over the years (FY20E: 3%; FY21: 3-4%; FY22-23: 4-6% and Beyond: 7-9%) with consolidated Net Automotive D/E currently at 0.68x as of 31st Dec 2019 vs. 0.75x as of 31st Dec 2018.

Net net we believe with the coronavirus uncertainty and lack of demand in the domestic markets it may take some time for a complete recovery for the company ahead.

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