Q3 Results: Tata Motors Posts Rs 27,000-Crore Loss On JLR Woes

Tata Motors Ltd. reported its third straight quarterly loss as its key luxury car unit—Jaguar Land Rover—continued to struggle, leading to a significant mark-down in its book value.

Net loss stood at Rs 26,993 crore in the December-ended quarter compared with a profit of Rs 1,077 crore a year ago, according to its stock exchange filing. Analysts tracked by Bloomberg had expected a profit of Rs 772 crore.

• Revenue rose 5 percent to Rs 77,000 crore.
• Operating profit fell 20 percent to Rs 6,381 crore.
• Margin narrowed 260 basis points to 8.3 percent.

The surprise loss was due to a non-cash write off worth Rs 27,838 crore for JLR. Tata Motors attributed it to slowing sales in China, technology disruptions and rising cost of debt. “This reduces our depreciation and amortisation by almost 300 million pounds per annum,” Chief Financial Officer PB Balaji said in an anlyst conference call. “It is a right step taken in terms of reducing our cost, improving our break even and ensuring our competitiveness.”

Jaguar Land Rover, that contributes nearly 72 percent to Tata Motors’ revenue, has had a bad year. Sales fell for the large part of 2018 due to a decline in demand of diesel vehicles, slowing business in key market China and uncertainties over Brexit. The U.K.’s largest carmaker also shut down one of its plants in October to cope with the weakening demand. Besides, it announced a production cut in April this year.

Diesel vehicles account for about 90 percent of JLR’s sales in Europe. But consumers are increasingly switching to more environment-friendly options like hybrid and electric vehicles. Market conditions in China—the growth engine for JLR—remain challenging. “Weak sales and the de-stocking impacted our performance there,” Balaji said.

Yet, the biggest risks to the company come from Brexit. In the previous quarter, JLR had cut down its planned spending by 500 million pounds to 4.03 billion pounds over the current and the next financial years for weathering the “volatile external scenario”.

JLR Chief Executive Officer Ralf Speth warned that a “no-deal” Brexit and lack of clarity threatens the carmaker’s entire operational set up. “Just one part missing could mean stopping production at a cost of 60 million pounds a day. That is a huge risk,” he had said earlier.

Moody’s Investors Services, S&P Ratings and Fitch Ratings have put Tata Motors’ credit rating on a “negative watch” as increased risks from an untidy Brexit could have an impact on business, and its rating. “Trade barriers and logistic issues arising upon a disorderly Brexit could have an impact on JLR’s competitive positioning, and lead to significantly lower sales and profitability and higher working-capital needs,” Fitch said. “This could lead to a downgrade by at least one notch.”

The company is hopeful that a deal for Brexit is reached and the “borders continue to remain free”. Balaji, however, said it needs to be prepared for the otherwise, too. “We need to look at all possible matters. It also depends on the kind of movements currency will make. Currency is likely to depreciate,” he said. “And that would make us more competitive.”

Balaji also said a turnaround strategy in China is underway. The carmaker will focus on incentivising retailers so that they can pull customers—something it did in India too when its car business was under stress. “We have simplified our incentive structures. We have moved away from wholesale incentives to retail incentives,” Balaji said. “I am confident that this model will pay us rich dividends in the long run. This is exactly what we did in Tata Motors as well. We put our head down and stuck to the basics.”

In January, JLR announced that it will cut 4,500 jobs as part of its cost-saving programme. That it expected to have a one-time redundancy cost of around 200 million pounds in the ongoing quarter.

LKP Securities Senior Research Analyst Ashwin Patil said that he was expecting some sort of turnaround in Tata Motors’ results in the reported quarter, but “nothing was satisfying”.

While the management remained “clueless” on the Brexit issue, the turnaround continued to be impacted by overall volumes in the Chinese market and the U.K., Patil said, adding that the China market will remain stressed for a long time. “When China starts recovering, JLR will start recovering.”

“There are multiple levers turning negative for the company,” Patil said, adding that the company would continue to hover under pressure for about two to three more quarters.

Domestic Profitability Continues

Tata Motors’ standalone profit jumped threefold over the same quarter last year to Rs 618 crore.

In a challenging year for Indian automakers, Tata Motors was able to remain profitable, while also improving its market share in commercial and passenger vehicle segments. “Passenger vehicles continue to outperform the industry, with the new products driving growth,” it said in its media statement.

Other Highlights

• Free cash flow stood at a negative Rs 5,228 crore reflecting lower operating profit at JLR and negative working capital.
• Net debt stood at Rs 46,912 crore reflecting the negative free cash flow.
• Tata Motors expects its operating margin to be between 3 percent and 6 percent for the next two financial years. That’s slightly lower than the 4-7 percent it had said earlier.
• The company’s U.K. investment plans remain unchanged.

Shares of Tata Motors have declined 60 percent in 2018 when the benchmark Nifty Index rose 3.15 percent. Ahead of the results, the stock closed 2.6 percent higher.