Tata Motors Q3 net profit halves, JLR margin sags

Tata Motors Ltd, posted its first drop in profits in five quarters as its Jaguar Land Rover (JLR) business faced higher spending and a drop in operating margin after 18 months of soaring profit.

Rising investment costs and falling profitability at the British carmaker, whose profits have propped up its weaker parent for the past year and half, combined with a drop into the red for the Indian company's domestic business.

JLR said operating margin was 14 per cent in the December quarter, down from 17 per cent a year ago, also due in part to a shift towards less profitable models.

JLR expects operating margin to remain stable in the coming quarters, chief finance officer, Ken Gregor, told reporters, describing earlier margins as "extraordinary".

"The challenge for us as a business is to sustain at roughly the levels that they are at right now," he said.

Increasing reliance on lower-margin models like the Land Rover Evoque and Freelander and adverse currency movements saw JLR's profit margin fall, and free cash flow turned negative just months after it paid its weaker parent a maiden dividend.

JLR's cheaper, lower-margin Evoque and Freelander compact SUVs accounted for 52.5 per cent of all Land Rover retail sales in the quarter, up from 43.7 per cent a year earlier.

Currency fluctuations shaved off 50 basis points from JLR margins in the December quarter, the company said. The pound rose 0.7 per cent against the dollar during the quarter, denting profits earned in the United States.

Tata's net profit for the third quarter of the financial year ending March 31 came in far below market estimates at Rs 1,628 crore, down 52 per cent on the year and the first fall since the three months to September 2011.

Analysts had expected average profit of Rs 2,890 crore, according to Thomson Reuters Starmine.

"Over the next couple of years, they are unlikely to generate much cash. That's a worry," said Joseph George, analyst at IIFL Institutional Equities in Mumbai.

JLR had net cash of 437 million pounds at end-September, but as it ploughs money into a new engine plant in Britain and a factory in China, it will no longer drive cash generation at its owner, Asia's seventh-biggest carmaker by market value.

Shares in Tata Motors, which is also listed in New York, fell 2.5 per cent in Mumbai on Thursday before the results. The broader market ended down 0.6 per cent.

MARGIN PRESSURE

JLR's cash was the primary reason behind an improvement in Tata Motors' consolidated net adjusted debt to operating EBITDA ratio to 0.98 in the year to last March from 1.21 in the previous year, ratings agency Fitch said in a recent note.

The maker of sleek Jaguar saloons and rugged Land Rover sport utility vehicles (SUV) raised $500 million in fresh debt last month and said it would raise funds from capital markets and banks to fuel its capital expenditure as required.

In China, the world's biggest auto market, JLR sales jumped 71 per cent in 2012, making it the marque's No.2 market after Europe. JLR is investing $1.7 billion with local partner Chery Automotive to build a factory in China.

JLR contributed around 90 per cent of Tata Motors' net profit in the last financial year, so its margins are scrutinised more by investors than those of Tata's domestic business.

The Indian automaker's core domestic business making trucks, buses and cars lost Rs 458 crore in the quarter, against profit of Rs 174 crore a year earlier, as revenue fell 20 per cent.

Operating margin for the India business fell to 2.2 per cent from 6.7 per cent a year earlier. The Indian parent's chief financial officer, C. Ramakrishnan, said the margin was one of its lowest ever.

The external environment and overall economic activity in India remained challenging, Mr Ramakrishnan said, adding: "demand continues to remain under pressure for our products."

Copyright Thomson Reuters 2013