Tata Motors: Positives priced in

Tata Motor’s future profitability hinges on its ability to scale up JLR volumes and execute a slew of cost-reduction measures.

The markets have given a thumbs-up to the improvement in consolidated numbers of Tata Motors for the September 2009 quarter. Its shares closed 5 per cent higher at Rs 661 yesterday as compared to its Friday’s closing.

Tata Motors’ subsidiary Jaguar Land Rover (JLR), reported an operating profit of 41 million pounds (Rs 315 crore, based on a euro-rupee exchange rate of 76.83) on higher volumes and better realisations signalling a turnaround at the UK-based company’s financial performance.

Net profits for the consolidated entity came in at Rs 22 crore as against loss of Rs 329 crore in the June 2009 quarter and Rs 942 crore in the September 2008 quarter. The company would have reported a loss of Rs 148 crore, if one were to adjust for the one-offs such as profit from sale of investments and forex loss.

Compared with the June 2009 quarter, wholesale volumes (sales to dealers) at JLR were up 23 per cent to 44,000 units for the quarter primarily driven by the rise in Land Rover sales that were up by a third. Land Rover contributes 2/3rds to volumes while Jaguar accounts for the rest.

While UK, China and Russia recorded growth, other key markets of the US and Europe (excluding Russia) recorded a fall in sales. Although retail sales for JLR were more or less flat as compared with the June 2009 quarter, the company expects sales to stabilise with the improvement in market conditions and show a jump in the March 2010 quarter when it launches the new Jaguar XJ model.

On the debt front, the recent GDR issue and payment of bridge finance has helped the company bring down its consolidated debt. The company plans to reduce its net debt levels further in the automotive business, which currently stands at Rs 23,000 crore, by divestments and further equity funding.

While product development and engineering expenses continue to be a drag on JLR, (about 75-100 million pounds a quarter), future profitability hinges on the ability of the company to scale up sales volumes and execute a slew of measures which include rationalisation of its UK-based manufacturing facilities, R&D centres, productivity improvements and low-cost sourcing arrangements.

The hardening of commodity prices, however, could spoil the show for the company in the coming quarters.

While there has been a turnaround in performance, Tata Motor’s stock has run up 17 per cent over the last one month and is trading at a premium to the sum-of-the-parts analysts’ estimates that pegs the fair value at Rs 465-550.

source: Business Standard

Tags: tata motors

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