Coronavirus fear: Tata Motors cuts JLR full year Ebit margin guidance by 1%

COVID-19’s impact on Tata Motors has been spooking investors.
The coronavirus outbreak is set to weigh on Jaguar Land Rover’s (JLR’s) full year performance, Tata Motor’s said on Friday. 

The pandemic, which claimed more than 3,000 lives globally, continues to spread at a rapid pace in several countries.

This has prompted the Mumbai-based firm to lower full year earnings before interest and tax (Ebit) margins by 100 basis points.

“Recognising that the present situation is highly uncertain and could change, the reduction in China sales is estimated to reduce JLR’s full year EBIT margin by about 1 per cent. However, the free cash flow in the fourth quarter is still expected to be modestly positive,” the company said.  P B Balaji, chief financial officer, Tata Motors Group, had given a guidance of 3 per cent EBIT for the full year after the December quarter. He cautioned that it could be hit by the virus outbreak.

The cut in full year outlook is set to dent the performance in the March quarter. According to analysts’ estimates, a 100 basis points cut in EBIT for the full year will lower the EBIT margin for the January-March quarter by 4 per cent as three quarters have already passed.  Mitul Shah, vice-president at Reliance Securities, expects Q4 to be highly subdued because of the impact of COVID-19. “We may have to cut earnings for the stock for FY20 and FY21 but we remain optimistic of the long-term potential,” Shah added.

COVID-19’s impact on Tata Motors has been spooking investors. Year-to-date, the company’s shares have dropped 38 per cent. It closed at Rs 114.25 on Friday, down 9.07 per cent. The viral outbreak comes amid Tata Motors efforts to turn around the UK subsidiary that has been battling disruption. This (disruption) had aggravated due to Brexit, sudden change in buyer preference from diesel to gasoline and slowdown in China sales.

In the December quarter, Tata Motors reported a consolidated profit before tax of Rs 1,350 crore; the same period a year ago had seen a loss before tax of Rs 29,228 crore. Net profit at the consolidated level at the end of these three months was Rs 1,756 crore, against a net loss of Rs 26,961 crore in the corresponding period last year. Coronavirus has significantly impacted China sales with February retails down around 85 per cent year-on-year. “In the first half of the month, about 20 per cent of dealers were open which has improved to over 80 per cent now, although most are still operating with reduced staff and facilities, Tata Motors said in the statement. JLR expects this to improve during March itself. However, retail sales are expected to recover more gradually. Spread of the virus to other markets such as South Korea, Japan, and Italy will also impact sales in those markets, it added.

JLR imports a relatively small percentage of parts from China with majority being sourced from Europe and the UK. Though over 95 per cent of its tier-1 and tier-2 suppliers in China are now open, they are operating at reduced capacity.  The company said a shortage of a critical component could impact production at some point.

Speaking about the impact on domestic business, Tata Motors said, in the days ahead, there will be  uncertainties with regard to supply of parts for the BS-VI ramp up. This could lead to limited volume losses in Q4.  This is, however, expected to recover as market demand is likely to improve gradually upon transition into BS-VI. “The timeline for a complete re-balancing of supply and demand is dependent on further developments in the coming four to six weeks. The domestic business is poised to overcome the current challenge with a limited impact on the overall FY21 performance,” the company said.

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