Lower JLR Margins Hit Tata Motors In The Third Quarter
Tata Motors misses estimates by a mile.
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Tata Motors Ltd. stock fell over seven percent after the company reported a 96 percent decline in profit for the third quarter of financial year 2017, after its subsidiary Jaguar Land Rover (JLR) reported a 5 percentage point contraction in margins. As a result, JLR saw its profit decline by more than 60 percent, year-on-year, to Rs 167 crore.
Net profit on a consolidated basis in the December ended quarter fell to Rs 112 crore from Rs 2,953 crore in the corresponding quarter in the previous financial year. The consensus of analysts tracked by Bloomberg had pegged the bottom line at Rs 2,265 crore.
Revenue in the third quarter decreased 4.3 percent to Rs 68,541 crore from Rs 71,617 crore in the same quarter last year.
Earnings before interest, taxes, depreciation and amortisation (EBITDA) declined 41.7 percent to Rs 5,161 crore from Rs 8,855 crore year-on-year. The EBITDA margin, or the operating profit margin, contracted 490 basis points to 7.5 percent.
The JLR business had a disappointing quarter due to a combination of reasons from lower wholesales to weak product mix, according to the company’s media release.
Lower wholesale volumes and relatively weaker product mix (including the run out of Discovery) in Jaguar Land Rover business, overall higher marketing expenses partially offset by credit relating to the recovery because of explosion at the port of Tianjin (China).Tata Motors’ Press Release
Lower wholesale volumes coupled with a less favourable product mix resulted in a negative margin impact of 2 percentage points for JLR. Margins are sometimes affected negatively when there is higher share of low-margin products in the overall sales volume. Higher marketing spends on the back of new variants in 2016 and the introduction of new vehicles resulted in a further 2 percentage point margin contraction.
Finally, a biennial pay negotiation with employees reduced JLR’s margin by 0.4 percentage points, as the higher salaries had to be paid out with arrears.
At a press conference to announce the financial results, C Ramakrishnan, chief financial officer at Tata Motors said many of the negative effects on JLR’s margin were “timing issues”. The fourth quarter has historically been a strong quarter for the company, and it will likely bounce back with better profitability, he said.
On a standalone basis too, Tata Motors posted a loss of Rs 1,046 crore as the commercial vehicle segment slowed down due to demonetisation. While commercial vehicles continued to drag, the passenger vehicle segment sustained growth on the back of strong demand for its Tata Tiago hatchback, the manufacturer said in the release.
The Indian entity’s operating profit margin contracted to 1.5 percent in the third quarter compared with 6.0 percent in the same quarter a year ago, primarily on account of the decline in medium and heavy commercial vehicle sales.
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Total sales (including exports) the quarter ended December 31, 2016, stood at 1,32,572 units, a growth of 7.5 percent, as compared to the corresponding quarter last year.