Luxury Cars – Tata Motors reports significant improvement in top-line and operating level in Q3; cost cutting efforts boost margins
Tata Motors Ltd – the car making arm of conglomerate Tata Sons – reported a 67.52% year-on-year increase in consolidated net profit for the December quarter on the back of a gradual recovery in sales of Jaguar Land Rover vehicles in important markets like China, improvement in passenger and commercial vehicles business in India and cost-cutting efforts of the company.
The net profit for the period stood at ₹2,941.48 crore when compared to ₹1,755.88 crore in the year-ago period. On a sequential basis, the company’s net profit improved substantially from a loss of ₹307.26 crore in the September quarter. Company’s focus on keeping tight control over its fixed cost also improved the operating performance at a consolidated and standalone level.
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As a consequence of the gradual improvement in sales of JLR and in the domestic business, the company’s consolidated revenue from operation increased by a modest 5.54% to ₹75,653.79 crore. On a sequential basis, the top-line improved significantly from ₹53,530 crore in the September quarter.
Despite a 16.9% increase in its raw material cost, the Mumbai-based automaker reported a whopping 60% increase in its operating profit or earnings before interest, tax depreciation and amortisation to ₹11,500 crore and its margins expanded by 540 basis points to 14.8 %.
As a result of improved operating performance, the company managed to beat Bloomberg’s net profit estimate of ₹1173.10 crore but fell short of the revenue estimate of ₹76658.7 crore.
During the quarter, sales of Jaguar Land Rover’s luxury passenger vehicles declined by 9% year-on-year to 1,28,500 units but on a month-on-month basis sales improved by 13%. Sales of the company’s luxury cars in China jumped by 19% on a corresponding basis as the economy seems to have recovered significantly compared to some of the other developed markets.
The United Kingdom-based subsidiary’s net sales declined by 6.5% to 6 billion pounds but its Profit before Tax improved by 38% to 439 million pounds as a result of an improvement from its cost-cutting efforts. The recently announced Brexit deal is also in line with the company’s expectations and will not disrupt its operations. The prevailing lockdown in Europe and Britain though might hamper prospects in the coming months.
According to P Balaji, group chief financial officer, over the last 18 months, the company has taken steps to improve its operations in China and the current increase in sales in China is a reflection of those efforts and the overall improvement in the economy of the country. The management also expects the current momentum in sales to continue in the coming quarters.
“The new Brexit deal will remove any risk of tariff that was expected earlier and the deal is in line with our base plan. There is some friction at the borders but we are managing and production will continue. We will have to comply with the Rules of Origin part but for that, we have time till 2024. So, till then we are fine and there is no problem in the short term,” added Balaji.
In its annual general meeting last year, Tata Motors announced its plan to become debt-free in the next three fiscals. In pursuit of that goal the company generated a free cash flow of ₹7,900 crore at a consolidated level during the quarter and also reduced its net automotive debt to ₹54,700 crore from ₹61,700 crore in the September quarter.
For the India business, which houses the commercial and passenger vehicle units, revenue from operation jumped by 34.92% year on year to ₹14,360 units as sales of its passenger vehicles zoomed and higher realisation from the commercial vehicle sales. The net loss also reduced by 38.6% to 638 crore. Retail sales of Tata Motors’ passenger vehicles increased by 56% to 77,200 units while the same for commercial vehicle declined by 24% to 74,900 units.
“In the Indian business, we are selling more passenger vehicle than commercial vehicles. Usually, the commercial vehicles are more profitable, but profitability is improving because we have kept our focus on the cost,” said Balaji.
“While we believe lower capex and the government’s stimulus would support JLR, improving PV business and focus on cost control would improve TTMT’s standalone margin. Moreover, tight control on capex and R&D would lower its automotive debt to a greater extent over the next 2-3 years. In view of the ongoing revival of JLR’s global business and restructuring of domestic business coupled with an attractive valuation, we maintain a positive view on the stock,” said Mitul Shah, vice-president, Reliance Securities.