Tata Motors Hit By JLR’s Lower Margin Outlook

The stock prices of Tata Motors have taken a massive hit today. This was in reaction to the management’s out of the blue announcement of its concern over the margin forecast of Jaguar Land Rover (JLR). As JLR is a major contributor to the financials of Tata Motors, the company becomes highly sensitive to any movement in JLR. Overall, JLR constitutes more than 65-70% of Tata Motors’ consolidated revenues. In terms of profitability, it accounts to more than 90% of the company’s consolidated profits.

The management has said that although revenues are expected to be higher in Q3FY13, the margins are likely to be impacted by several factors including unfavourable foreign exchange rates and the ongoing effect of a higher mix of Range Rover Evoque sales, among other factors.

To drive sales, JLR has launched a host of cheaper models including the XF, Freelander and Evoque. Together, these models contribute to 54% of the total sales volume of JLR. The average selling price of these models is GBP 30000 as compared to the GBP 42000 average on other models. The Evoque, in particular, has been truly successful in driving volumes for JLR. As of December 2012, it contributed to 37% of Land Rover volumes and 32% of JLR volumes. The model has seen a YoY growth of 43% in sales volume in Q3FY13 as compared to the previous year. This would bring to bear a positive impact on the topline of JLR, though at the same time, the margins would be hit.

Moreover, as a result of higher capital spending, the free cash flow is also expected to be negative in this quarter. Tata Motors had forecasted capital expenditure of approximately GBP 2 billion for FY13 towards products and facilities. The negative cash flow would also seep into FY14 as JLR plans capital expenditure of GBP 2.75 billion towards developing models and building a factory in China.

As of September 2012, JLR was sitting on a cash pile of GBP 2.18 billion. At the same time, its debt level at the end of Q2FY13 was GBP 1.74 billion. It recently said that it would be raising a further USD 400 million to support operational costs and future growth plans. The rising debt coupled with the increasing need for debt is likely to take a higher toll on the net profit of JLR.

Although these factors can cause short-term hurdles in the financial position of JLR, they are likely to have a long-term effect that would benefit the company to a large extent. Aggressive launches of new products, boosting sales in emerging countries and improving efficiency in these markets by setting assembly or manufacturing units would lead to good prospects over a longer horizon. We thus maintain a long-term positive outlook on Tata Motors and recommend buying the stock on dips.