Meltdown in Chinese vehicle demand has erased gains made by Jaguar Land Rover in other regions.
IHS Automotive perspective | |
Significance | Tata Motors' consolidated profit declined 48.7% year on year (y/y) to INR27.7 billion (USD434.1 million) during the three months ended 30 June 2015, while sales revenues contracted 5.7% y/y. |
Implications | The automaker's quarterly earnings were heavily affected by a lower contribution from its twin British luxury brands, Jaguar Land Rover (JLR), which are struggling in their biggest market. |
Outlook | Tata Motors' performance in India is improving in the passenger vehicle and medium and heavy commercial vehicle sectors. However, margins at JLR are expected to remain under pressure as the brands invest heavily in capacity during fiscal year 2015/16. |
Tata Motors has reported a 48.7% year-on-year (y/y) slump in its consolidated earnings for the quarter ended 30 June. In a statement, the automaker said its profit after tax stood at INR27.7 billion (USD434.1 million) during the first quarter of fiscal year (FY) 2015/16, in sharp contrast to INR53.9 billion in the same period last year. Meanwhile, the automaker posted a 16.4% y/y decline in consolidated earnings before interest, taxation, depreciation, and amortisation (EBITDA) to INR98.2 billion during the quarter. During the latest three months, the automaker's consolidated revenues (net of excise duty) contracted 5.7% y/y to INR610.2 billion.
On standalone basis, Tata Motors' profits shrunk 34.6% y/y to INR2.6 billion. Although sales revenues for the latest three months increased 20.7% y/y to INR92.9 billion and EBITDA moved into positive territory, profits shrunk as a result of a decline in other income and a substantial increase in debt levels. Despite lower profits, the improvement in operating performance was visible through the positive EBITDA margin of 4.7%. The automaker posted EBITDA of INR4.4 billion during the latest quarter, compared to a negative value of INR2.2 billion a year ago. Sales of commercial vehicles during the quarter stood at 71,627 units, a decline of 4.5% y/y, while sales of passenger vehicles gained 27.4% y/y to 32,298 units. Export volumes also jumped 32.1% y/y to 13,514 units.
The marginal gains in standalone business were compensated by a marked deterioration in the marquee JLR brands, which reported a 29% y/y decline in net profit during the quarter. The luxury division's profit after tax stood at GBP492 million (USD761.9 million) in the latest period, while EBITDA slipped 24.5% y/y to GBP821 million. Quarterly revenues shrunk 6.6 % y/y to GBP5 billion. Jaguar wholesales gained 8.3% y/y to 21,202 units during the quarter but it was more than offset by a 6.4% y/y decline in Land Rover deliveries 89,446 units. As a result, combined wholesale volumes of the two marquees slipped 3.9% y/y during the quarter. Lower sales volume, coupled with less favorable model mix, resulted in the EBITDA margin of 16.4%, down from 20.3% in the same period a year ago.
China price cut
The reduction in sales volumes was driven by a 33% drop in retail volumes in China where JLR sold nearly 21,900 units in the quarter. Slower sales of the locally produced Evoque and its price difference with the imported version were two of the factors behind the steep decline. As a result of poor sales, the automaker decided to reduce the price of its locally produced Evoque by 6%, after releasing financial statements. Meanwhile, the Jaguar XE small saloon will also see price realignment, although the magnitude of the price cut is not clear yet. The automaker has also decided in favour of shorter payment terms for marketing payments to its dealers which are reported to have teamed up in China to achieve better terms and conditions (see China: 6 August 2015: JLR readjusting dealers' margins, Evoque lookalike to go on sale in China).
Tata Motors' Q1 FY 2015/16 results | |||||||||
| Consolidated (INR bil.) | Standalone (INR bil.) | JLR (GBP mil.) | ||||||
| Q1 FY 2015/16 | Q1 FY 2014/15 | Y/Y % change | Q1 FY 2015/16 | Q1 FY 2014/15 | Y/Y % change | Q1 FY 2015/16 | Q1 FY 2014/15 | Y/Y % change |
Sales revenue | 610.2 | 646.8 | -5.7 | 92.9 | 77.0 | 20.7 | 5,002 | 5353 | -6.6 |
Operating profit/loss (EBITDA) | 98.2 | 117.4 | -16.4 | 4.4 | -2.2 | - | 821 | 1,087 | -24.5 |
Profit/loss after tax | 27.7 | 53.9 | -48.7 | 2.6 | 3.9 | -34.6 | 492 | 693 | -29.0 |
Outlook and implications
As in recent times, Tata Motors' quarterly performance was largely dictated by the luxury division which is faltering now after cushioning the group in the last couple of years. Although Tata Motors is now witnessing higher sales of passenger and commercial vehicles in India, this is yet to translate into a positive contribution to profitability. Meanwhile, the turnaround in medium and heavy commercial vehicle (MHCV) demand in India is a big positive factor for the company (see World: 15 June 2015: Tata Motors' global shipments increase 2.1% y/y in May).
Despite the turnaround under way in Tata Motors' standalone business, JLR remains its biggest source of profits. As a result, JLR's disappointing sales is weighing high on Tata Motors' consolidated financial performance. China – the biggest market for JLR – also happens to be a source of the weakness, offsetting the volume gains in most other markets. A government crackdown on corruption and stock-market meltdown has affected sales of luxury vehicles in China, and JLR has witnessed a multiplier effect on its fortunes. In addition, consumers' confidence has been jolted by a controversy over the Evoque's automatic transmission and the eventual recall of the imported units. Meanwhile, the emergence of the strikingly similar Landwind X7 and JLR's inability to stop the Chinese automaker are concerning for the luxury brand (see United Kingdom - China: 21 April 2015: JLR unable to take legal action against Jiangling Motors on Landwind X7 design). Reportedly, more than 5,500 orders have been received for the low-priced Landwind X7.
In view of the headwinds, introduction of new models becomes more important for JLR and, by extension, for Tata Motors. Important among these are the Jaguar XE and the new Jaguar XF in the second quarter of FY 2015/16, while introduction of Jaguar F-PACE SUV and Evoque Convertible in the fourth quarter of FY 2015/16 will also be crucial. While these models will drive significant volume growth, EBITDA margins are expected to be lower than the levels seen in 2014/15. This change in EBITDA margins will be fairly permanent, reflecting the impact of model mix.