Tata Motors missed the street’s earnings expectations by a wide margin for the June quarter. This was on account of the weak performance by its UK subsidiary Jaguar Land Rover (JLR) which contributed about 70% to the consolidated revenue. The reaction on bourses was measured however with the stock losing around 1% on Thursday, a day after the result declaration. This was driven by the company’s guidance of a substantial volume recovery for JLR from the September quarter amid improving chip supply and better product mix with rising share of new models.
The operating margin before depreciation and amortisation (EBITDA margin) of JLR dropped by 620 basis points sequentially to 6.3% because of lower sales volume, lower production of superior margin products, volume reduction in the Chinese market and higher input costs. The wholesale volume excluding China slipped by 15% sequentially to 71,815 in the June quarter. In addition, the company’s volume ramp of higher margin models such as new Range Rover and Range Rover Sport has been slower. These two models accounted for nearly 17% of the total ex-China volume compared with 20-30% in the previous few quarters.
However, improving chip supplies and swelling order book for new models augurs well for JLR. The company has guided for a volume of 90,000 units in the second quarter of FY22 implying a sequential increase of 26%. JLR has an order backlog of around 2,00,000 units. The order booking for Range Rover and Range Rover Sport account for 40% of total order book and currently account for less than 20% of the total sales volume. It means JLR will be selling more high margin models, which may support profitability.
The street expects JLR’s volume growth to be 10-15% for FY23. That would require quarterly sales of 84,000 units for the remaining fiscal year. JLR’s volume growth has lagged other luxury peers resulting in the loss of market share. On a three-year compounded annual growth rate (CAGR) basis, JLR volume decreased by 15% while volumes of BMW, Audi and Mercedes were down by 4-6%. The peers also demonstrated better pricing power. This would restrict JLR’s ability to pass on higher prices even with refreshed portfolio to keep its product competitive. Therefore, it would restrict expansion of realization benefit and achieving 5% EBIT margin guidance would be a daunting task.
Back home, Tata Motors reported market share improvement in the passenger vehicles (PV) segment. In addition, improving freight demand and high truck fleet utilization auger well for commercial vehicles (CV) business. Its PV plants are at full capacity and it is debottlenecking plants to increase the capacity by 10-15%. The PV revenue reached nearly half of Maruti Suzuki even though the volume was just one-fourth during the June quarter.
The company’s total net automotive debt rose to Rs 60,700 crore at the end of June 2022 from Rs 48,700 crore a quarter ago. The company attributed the increase to the adverse working capital cycles. Though analysts expect net automotive debt of Rs 25,000-30,000 crore by end of FY24, the company plans to become net debt free by then.
The stock has been in a tight range over the past three months. The volume ramp-up of the JLR in the near team and the extent of deleveraging would be key triggers for the stock in the medium term.
For the quarter, net profit from joint ventures and associates amounted to INR 36 crore compared with a loss of INR 130 crore in Q1 FY22. During the quarter under review, free cash flow (automotive) was negative at INR 9800 crore as compared to negative INR 1820 crore in Q1 FY 22), primarily due to working capital impact of INR 8900 crore.
Tata Motors has reported a consolidated net loss of Rs 4,951 crore in the June quarter as chip shortage and COVID-19 lockdown in China impacted Jaguar Land Rover sales.
