Tata Motors Ltd’s shares had plummeted after it announced its December quarter results, and they still haven’t recovered (See chart). Its March quarter results announcement will have the exact opposite effect, helping the company’s shares bridge the gap with peers.
While profits were expected to rise sharply compared to the low base in the December quarter, hardly anyone expected earnings to more than double. Analysts at Kotak Institutional Equities and Nomura Research, for instance, had estimated consolidated earnings before interest, tax, depreciation and amortisation (Ebitda) to rise between 70 and 80% on a quarter-on-quarter basis.
Tata Motors, instead, reported a 125% sequential jump in Ebitda to Rs10846 crore. Needless to say, the bulk of the increase in profits came from a jump in Jaguar Land Rover. Earnings before interest and tax (Ebit) of the UK subsidiary rose 156% sequentially to Rs5,930.3 crore.
JLR’s performance had been hit in the December quarter owing to the phasing out of the ‘Discovery’ model, besides an adverse change in the product mix. Ebitda margins had fallen to as low as 7.6%, compared to healthy double-digits in previous quarters.
While the phase out continued to impact sales of Land Rover, a sharp rise in volumes at China more than made up in the March quarter. Besides, the product and geography mix turned favourable and operating leverage kicked in, resulting in a sharp jump in profits. Consolidated Ebitda margin rose to nearly 14% last quarter.
The company’s domestic business improved substantially, too; although given the much larger scale of JLR’s operations, it was barely enough to move the needle as far as overall results were concerned. Tata Motors’ standalone revenues, which largely capture the domestic commercial vehicles and passenger vehicles business, rose 35% sequentially. Ebitda margin rose from a mere 0.2% in the December quarter to 4.2% last quarter. The resulting profit of Rs620 crore at the Ebitda level was, of course, a drop in the ocean, when compared to the consolidated Ebitda of nearly Rs11,000 crore.
Tata Motors took a hit of around Rs150 crore on account of the inventory it held of BS-III standard vehicles as of end-March, over and above the impact of discounts given to customers to dispose stock ahead of the 29 March deadline for sale of these vehicles. The impact of discounts is visible in reported revenues and Ebitda, while the inventory related write-off has been shown as an exceptional item.
Thanks to new model launches in both the domestic business as well as in JLR, the company looks set for decent growth in the coming year. Of course, JLR’s fortunes could be affected by a slowdown in the US, although sales in China continue to be encouraging.
Analysts at Nomura say in a 5 May note to clients, “In FY18, we expect growth in wholesale volumes to remain healthy at around 10% y-y led by the ramp-up of New Discovery, launch of new Range Rover (RR) Velar (Aug-Sep 2017) and RR/RR Sport Refresh (Oct-Nov 2017). The stock trades at 3.6 times FY18 EV/EBITDA, which looks attractive given the estimated 32% Ebitda CAGR over FY17-19F.”