Tata Motors results reflect bumpy road ahead for Jaguar Land Rover

Tata Motors says it expects better margins and volumes for Jaguar Land Rover (JLR), its British-based luxury vehicle maker, pointing to cost control and product launches. However, analysts in general appear to disagree most have pared estimates of volume, margin and target price for the stock. Higher capital expenditure (capex) and weak demand in the near term in some key markets might continue to weigh on volumes and profit.

The latest announcement by the Trump administration in America to raise tariffs on imported automobiles and parts could add to JLR's woes. As with its German rivals, BMW and Mercedes, it will have to survive in markets prone to trade war. Tata Motors’ investors reacted negatively to the latest earnings results and the share was down 6.6 per cent, closing at Rs 288.95 on Thursday.

Impairment charges and higher expenses halved consolidated profit after tax at the Tata Group flagship for the March quarter over the year-before period, it said on Wednesday. JLR says it has kept £4.5 billion for the current financial year.

P B Balaji, chief financial officer for the Tata Motors group, says he expects growth and profit to be better than in 2017-18. He contends JLR’s operating earnings margin is likely to increase by 300 to 400 basis points (bps) by 2020-21; each bp is a hundredth of a percentage point. Driven by a pipeline of new products and stringent cost control.

Tata Motors has affected a change in its capitalisation policy on product development cost from this year. This will lead to a lower earnings before interest and taxes margin by 100 bps for JLR and 30/130 bps for Tata Motor's standalone commercial vehicles and passenger vehicles businesses. In anticipation, the company took a one-time impairment in the quarter for projects to be discontinued and assets to be restructured.

“We cut our volume growth estimates for JLR to reflect the lower base of FY18 and near-term weakness in key markets. We also cut margins to reflect the new accounting policy and lower economies of scale benefits,” wrote Arya Sen and Ranjeet Jaiswal, analysts from Jefferies India, in a post-earnings research note. They have raised their earnings estimate for the standalone entity.

In another report, Hitesh Goel, analyst at Kotak Institutional Equities, said he expected JLR to deliver a four per cent compounded annula growth in volume over this and the next two financial years. Led by strong growth in China's JV volumes, with more localisation and launch of new models. His target price for the stock is now Rs 445, from Rs 465 earlier. The reduction reflects an increase in the standalone business value, led by an increase in earnings estimates. Offset by reduction in value for the JLR business, due to increase in depreciation expenses and higher research and development expenses, he wrote.

Analysts are also concerned about JLR’s rise in capex over FY17. One at a domestic brokerage, who asked not to be identified, said with the sizable requirement here, the company needs to de-leverage the balance sheet. “This should be the top priority for the new CFO,” he said, feeling the current measures might not suffice, referring to stake sales, winding up of subsidiaries, etc.

Tata Motors' consolidated debt as on March 31 was Rs 693.6 billion. The analsyst quoted earlier says the the change in dvidend policy raises pressure on JLR to improve cash flow. It has been paying £150 million a year as dividend and the new policy will require the unit to pay 20 per cent of its profit after tax or £225 million as dividend for FY18. This dividend ratio will rise to 25 per cent of profit after tax from FY19.

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