Tata Motors: Low On India And High On JLR

Tata Motors announced their quarterly results on August 9, 2012. The performance has been rather disappointing on the domestic front. At the same time, the overall performance has been outstanding considering the robust performance of JLR. Regardless of the consolidated performance being robust and JLR contributing to roughly 85 per cent of Tata Motor’s profit, investors have been expressing their disappointment over the standalone performance, dragging the stock price lower by more than 2 per cent since the announcement. The domestic slowdown in the automobile sector has hit hard on the sales volumes of Tata Motors in the quarter ending June 2012. The standalone results of Tata Motors have been burdened to a large extent with regards to sales volume growth and financials.

Sales Volume For Q1FY13

In Q1FY13, the total sales volume of the company witnessed de-growth of 3.60 per cent when compared to the corresponding quarter in the previous year. The segments that have taken a major hit are medium and heavy commercial vehicles (M&HCV) with a decline of 24.17 per cent, passenger cars with a reduction of 11.93 per cent and exports with a decline of 11.66 per cent.

The outlook for M&HCVs has been rather drab due to the weak macro-economic performance, low freight availability and higher excise duty adding to the already expensive funding that has hit the demand. Moreover, there has been increasing pricing pressure in this segment on the back of manufacturers heavily increasing incentives to spark the demand. To top it up, the entry of new players and those with a smaller base have been rapidly capturing sales, thereby affecting the market share of Tata Motors, which stands at 56.2 per cent in FY12. The LCV growth though has been strong for all the players and has largely supported the growth seen in commercial vehicles, offsetting the over 20 per cent de-growth seen in the M&HCV segment.

On the passenger vehicles’ front, Tata Motors has not been able to capture the growth offered by the increased demand in utility vehicles. While players like Mahindra & Mahindra have been dominating the market with over 30 per cent YoY growth consistently, Tata Motors was able to grow at a modest 4.56 per cent, even with the launch of Sumo Gold. At the same time, the passenger cars’ sales volumes declined by 11.93 per cent due to the drastic decline in the demand of petrol variants and the higher cost of funding.

Exports too were under pressure because of significant hikes in the duties on imported vehicles in Sri Lanka. The demand in other geographies like Nepal, South Africa and the Middle East has been sustained. The cumulative effect though was a 11.66 per cent decline in volumes YoY.

Consolidated Performance Of Tata Motors

The poor performance of Tata Motors in India has been reflected largely in the financial performance of the company. On a standalone basis, there has been a decline in the topline by 8.93 per cent with net income from operations at Rs 10,586.41 crore in Q1FY13 compared to Rs 11,624.20 crore in Q1FY12. The EBITDA and PAT on a standalone basis dropped by 24.09 per cent and 48.83 per cent respectively. The margins too were significantly under pressure with a reduction in the operating margin and the net profit margin of 151 basis points and 143 basis points. The company’s model mix and marketing expenses have caused the margins to be subdued. 

On a consolidated basis though, the company’s performance has been outstanding because of the outperformance of Jaguar LandRover Plc. The net income from operations for Tata Motors increased from Rs 33,288.80 crore in Q1FY12 to Rs 43,323.61 crore in Q1FY13, marking a growth of 30.14 per cent. The EBITDA and PAT of the company grew by 39.74 per cent and 12.27 per cent respectively YoY. The company saw some moderation in sales in Europe with de-growth in the Land Rover sales but the overall volumes were higher. The key driver for this performance though has been China. China’s sales (wholesale) of Jaguar and Land Rover grew by 49.8 per cent and 97.1 per cent respectively. This has also reflected well in JLR’s financial performance with JLR revenue at GBP 3.638 billion in Q1FY13 from GBP 2.703 billion in Q1FY12, growing by 34.58 per cent.

Overall, we expect the performance of Tata Motors to remain robust on a consolidated basis. The standalone performance though will improve only with the start of the festive season with Q3 and Q4 being the quarters that account to the highest sales for any automobile manufacturer in India. Till this kicks in, we recommend investors to avoid the scrip. Investors can start accumulating the stock from the beginning of Q3 FY13.