Slow JLR recovery may weigh on Tata Motors’ profits

While operational gains will continue, firm may not turn profitable this year

The Tata Motors stock gained about 8 per cent on Monday after it posted a better-than-expected operational performance in the June quarter (Q1FY21). The gains were largely because of Jaguar Land Rover (JLR), which reported an operating profit margin of 3.6 per cent. This was because of better realisations, favourable foreign exchange, and government grants.

While an improved product mix and lower variable marketing expenses aided profitability, volume recovery in China, led by Land Rover, contributed to the improvement. China sales have grown steadily since a dip in February. In fact, China accounted for 38 per cent of the wholesale mix, the highest in 13 quarters. Its Chinese joint venture Chery JLR achieved break-even in the quarter because of low marketing expenses.

However, revenues were hit by Covidrelated lockdowns at both JLR and Tata Motors’ domestic operations. A 45 per cent fall in volumes for JLR and an 82 per cent drop in Indian operations led to consolidated revenues falling by about 48 per cent, compared to the year-ago level.

JLR’S performance in the short term could be impacted by efforts to reduce dealer inventory to 55 days from 90 days in the June quarter, but its overall performance is expected to be better than Q1FY21, say analysts at Motilal Oswal Financial Services. Tata Motors expects to turn free cash flow positive in both businesses from the September quarter.

Even as JLR continues to make money at the operating level, the India business reported a loss at the operating level for the fourth consecutive quarter because of low volumes and a weak product mix. Despite the deteriorating medium and heavy commercial vehicle mix to the portfolio, realisations were up on account of higher spare sales. While JLR’S retail sales in most markets are witnessing a recovery over the past three months, its domestic volumes could struggle to gain traction as it curtails inventory and there is excess capacity at the fleet operator level.

Though volume recovery will be the biggest trigger, the other key variable for the Street would be reduction in net debt, which is around ~68,000 crore. Net debt saw an increase in the quarter by about ~20,000 crore. Most analysts have revised their earnings estimates upwards to factor in improvement in JLR volumes and progress on cost cutting . Despite the favourable outlook on the volume front for JLR, a weak domestic business and high debt levels might derail its efforts to report positive free cash flows in the coming quarters.