Tata Motors swings to loss in Q2 FY 2015/16 on lower contribution from JLR

Tata Motors swung to a small loss during the quarter ended 30 September, despite higher revenues, as a lower contribution from its Jaguar Land Rover (JLR) luxury marques hit its consolidated performance. In a statement, the automaker said its consolidated loss stood at INR4.3 billion (USD65 million) during the latest quarter, reversing a profit of INR32.9 billion in the same period a year ago. During the time frame, the automaker posted a 25.1% year-on-year (y/y) decline in consolidated earnings before interest, taxation, depreciation, and amortisation (EBITDA) to INR77.3 billion. This was despite a 1.1% y/y growth in the automaker's consolidated revenues (net of excise duty) to INR613.2 billion.

The automaker performed better on a standalone basis, with losses shrinking to INR2.9 billion in the latest three months, down from INR18.5 billion in the same period a year ago. Tata Motors' sales revenues for the latest three months climbed 20% y/y to INR105 billion while EBITDA moved into positive territory. Operating profit totalled INR7.1 billion, marking a huge improvement from a loss of INR14.2 billion in the second quarter of its last fiscal year (FY). Tata's standalone passenger vehicle business registered a 5.2% y/y gain in sales volumes while sales of commercial vehicles (CVs) contracted 3.5% y/y. Although overall sales volumes edged down to 126,690 units, higher revenues reflected a substantially changed product mix. Within the CV business, sales of light commercial vehicles (LCVs) tanked 25.8% y/y to 38,101 units, partially offset by a 35.3% y/y jump in high-denomination medium and heavy commercial vehicles (MHCVs) to 39,782 units.

Amid gains in the standalone business, the performance of JLR brands markedly deteriorated. The luxury division swung to a loss of GBP92 million (USD138 million) in the latest quarter, down from a profit of GBP450 million in the same period last FY. The business suffered an exceptional charge of GBP245 million during the quarter due to damage to nearly 5,800 vehicles in the Tianjin Port explosion in August (see China: 24 August 2015: Toyota extends Tianjin production halt to Wednesday, blasts may have damaged 5,800 JLR cars). EBITDA of the business also declined 36.9% y/y to GBP589 million on account of unfavourable revaluation of foreign currency debt and higher manufacturing and launch costs. As a result, the EBITDA margin fell to 12.2% in the quarter, down from 19.4% a year ago. JLR's revenues during the quarter inched up 0.5% y/y to GBP4.83 billion, reflecting the impact of a subdued volume growth and a less favourable sales mix.

The weak second-quarter results dragged down the company's financial performance for the six-month period. The automaker's earnings for the six months slumped 73.2% y/y to INR23.4 billion, amplifying the impact of a poor first quarter (see China - India: 10 August 2015: Tata Motors reports 49% dip in Q1 FY 2015/16 earnings; JLR slashes prices in China). In addition to higher depreciation and amortisation and exceptional charges, the significant decline in profitability was also caused by lower revenues. The automaker's consolidated revenues declined 2% in the period to INR1.23 billion. As in other recent quarters, the situation was better with the standalone business, where losses were reduced to break-even point and revenues surged 20.3% y/y. Yet the luxury division's underperformance continued as profit shrank 65% y/y to GBP400 million and revenues slipped 3.2% y/y to GBP9.8 billion.

Outlook and implications

Within Tata Motors' traditional business, its recovering passenger-vehicles sales remain far from making the company a top player in the market, where competition has intensified in recent years. Within the CV segment, MHCV demand is solid as fleets continue to replace old vehicles with new ones while changing regulatory requirements further spur volumes. Starting October 2015, the Indian government has mandated the installation of anti-lock braking systems (ABS) and speed control devices in all new trucks of certain types. Worries persist in the LCV segment, where Tata Motors is still posting double-digit volume drops, although the rate of decline has moderated for the industry. Although a pioneer in LCVs, Tata Motors has lost its leadership status to Mahindra & Mahindra (M&M).

Tata Motors' second-quarter results once again show how critical the luxury vehicle business has become for the group. The JLR business contributes slightly more than 82% to the group's revenues and almost entirely drives its profits, as the standalone business is yet to recover and contribute profits. During the quarter, the luxury brands registered a massive 32% y/y volume decline in China. With this plunge, the country is no longer JLR's largest market. The brands sell more vehicles in the UK, while North America and Europe are also ahead of China on a regional basis. Nevertheless, China is still an important market and the group's performance will be dictated by its performance in the country going forward. On the positive side, there are indications of luxury vehicle demand recovering following a stabilisation in stock markets (see China: 13 October 2015: Passenger vehicle sales revive in China during September, BMW and Porsche report higher volumes). Regarding the exception loss from the Tianjin blasts, Tata Motors has made the provision of GBP245 million, some of which will be reversed when insurance and other recoveries are paid or confirmed in future periods.

JLR's volume performance is expected to improve in the second half of the year with the introduction of the Jaguar F-PACE in 2016 and new model year iterations of the Jaguar XJ and Evoque Convertible. However, EBITDA margins for the FY will likely follow the trend of substantial reduction from last FY's high levels, reflecting model mix and launch costs for the new products.