Tata Motors results reflect bumpy road ahead for JLR

Tata Motors says it expects better margins and volumes for Jaguar Land Rover (JLR), its British-based luxury vehicle maker, pointing to cost control and product launches. However, analysts in general appear to disagree most have pared estimates of volume, margin and target price for the stock. Higher capital expenditure (capex) and weak demand in the near term in some key markets might continue to weigh on volumes and profit. The latest announcement by the Trump administration in America to raise tariffs on imported automobiles and parts could add to JLR's woes. As with its German rivals, BMW and Mercedes, it will have to survive in markets prone to trade war. Tata Motors’ investors reacted negatively to the latest earnings results and the share was down 6.6 per cent, closing at ~288.95 on Thursday. Impairment charges and higher expenses halved consolidated profit after tax at the Tata Group flagship for the March quarter over the year-before period, it said on Wednesday. JLR says it has kept £4.5 billion for the current financial year. P B Balaji, chief financial officer for the Tata Motors group, says he expects growth and profit to be better than in 2017-18. He contends JLR’s operating earnings margin is likely to increase by 300 to 400 basis points (bps) by 2020-21; each bp is a hundredth of a percentage point. Driven by a pipeline of new products and stringent cost control. Tata Motors has affected a change in its capitalisation policy on product development cost from this year. This will lead to a lower earnings before interest and taxes margin by 100 bps for JLR and 30/130 bps for Tata Motor's standalone commercial vehicles and passenger vehicles businesses. In anticipation, the company took a one-time impairment in the quarter for projects to be discontinued and assets to be restructured. “We cut our volume growth estimates for JLR to reflect the lower base of FY18 and nearterm weakness in key markets. We also cut margins to reflect the new accounting policy and lower economies of scale benefits,” wrote Arya Sen and Ranjeet Jaiswal, analysts from Jefferies India, in a post-earnings research note. They have raised their earnings estimate for the standalone entity. In another report, Hitesh Goel, analyst at Kotak Institutional Equities, said he expected JLR to deliver a four per cent compounded annula growth in volume over this and the next two financial years. Led by strong growth in China's JV volumes, with more localisation and launch of new models. His target price for the stock is now ~445, from ~465 earlier. The reduction reflects an increase in the standalone business value, led by an increase in earnings estimates. Offset by reduction in value for the JLR business, due to increase in depreciation expenses and higher research and development expenses, he wrote.