Weak domestic business to offset gains on JLR front for Tata Motors

While JLR continues to make money at the operating level, the India business reported a loss at the operating level for the fourth consecutive quarter
Hit by Covid-related lockdowns at both JLR and its domestic operations, Tata Motors reported its second consecutive quarterly loss. Barring the profit in the December quarter last year, this will be the fourth quarterly loss since the start of FY20. A 45 per cent fall in volumes for Jaguar Land Rover and a 82 per cent volume drop in Indian operations led to revenues falling by nearly half of year ago levels. 

Given the higher fixed costs and negative leverage, operating profit saw a sharper 79 per cent slide to multi quarter lows. Though overall operating profit margins came in at 2 per cent, the weakness in profitability of the Indian business was offset by gains at the operating level for JLR. 

While an improved product mix, lower variable marketing expenses and favourable mix aided profitability, volume recovery in China led by Land Rover also contributed to the improvement. After a dip in February, China sales have been growing steadily over the last five months. In fact, China accounted for 38 per cent of the wholesale mix, the highest level in at least 13 quarters. Its Chinese joint venture Chery achieved break even in the quarter due to lower marketing expenses. 

While JLR’s performance in the short term could be impacted by efforts to reduce dealer inventory to 55 days from 90 days in the June quarter, the company expects to turn free cash flow positive in both businesses from the September quarter. Free cash flow for the core auto business was in the red at Rs 18,200 crore. 

While JLR continues to make money at the operating level, the India business reported a loss at the operating level for the fourth consecutive quarter. Low volumes and a weak product mix led to the loss. Despite the deteriorating medium and heavy commercial vehicle mix to the portfolio, realisations were up on account of higher spare sales. While JLR’s retail sales in most markets are witnessing a recovery over the last three months, its domestic volumes could struggle to gain traction as it curtails inventory and there is excess capacity at the fleet operator level. 

While volume recovery will be the single biggest trigger, the other key variable for the street would be reduction in net debt of just under Rs 68,000 crore. Net debt saw an increase in the quarter by about Rs 20,000 crore. Most analysts have revised their earnings estimates upwards to factor in improvement in JLR volumes and progress on the cost cutting initiatives. Despite the favourable outlook on the volume front in JLR, a weak domestic business, high debt levels may derail its efforts to report positive free cash flows in the coming quarters. 


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