On bumpy roads - TaTa Motors

While its domestic business is looking up, a tough outlook for JLR means that it may be a while before Tata Motors turns corner

On June 26, Tata Motors announced a whopping consolidated loss of Rs 2,505 crore for the year ended March 2009, its first loss in seven years. This was largely due to its UK-based operations of JLR (Jaguar Land Rover), which reported a loss of 306 million British pounds (about Rs 2,448 crore) for ten months (since June 2008) ended March 2009. The losses would have been higher by about Rs 2,800 crore as JLR capitalised R&D expenditure, which however Tata Motors claims is in line with its accounting policies.

For now, as JLR grapples to fight a global slowdown in vehicle sales, it is also taking various measures to cut costs and introduce new products/variants to improve profitability. While these moves should help JLR emerge stronger consequent to any global recovery in demand, most analysts don’t expect any visible recovery to happen anytime soon. In fact, they expect the JLR operations to turn in a loss in 2009-10 as well, offsetting the likely improvement in Tata Motors’ standalone business.

Global woes

The acquisition of Jaguar-Land Rover operations (previously owned by Ford Motor Co) by Tata Motors in mid-2008 was consummated on the eve of a downturn in global economic growth. The weak demand along with tight liquidity conditions thus, resulted in a sharp fall in sales at JLR. The US, UK and European (excluding Russia) markets, which account for about 75 per cent of volumes, reported a 31-38 per cent year-on-year (y-o-y) fall in sales volumes during June 2008 and March 2009; sales in markets like Brazil, Russia and China were up and limited the drop in total volumes to 32 per cent. Tata Motors’ Korean subsidiary, Tata Daewoo Commercial Vehicles, was also impacted with volumes down by 23 per cent, sales by 17 per cent and net profit by 30 per cent in 2008-09.

Cutting flab at JLR

Tata Motors has taken various steps at JLR in a bid to cut costs. Interestingly, even as the liquidity situation was tight, an increase in supplier payment terms by a third to 60 days and reduction in receivables (from dealers) and inventories (by 30 per cent) helped improve JLR’s working capital in 2008-09. While production has been aligned in line with demand, employee costs are being trimmed by 20 per cent (workforce reduction and agreement with workers for longer working hours and pay freeze). Likewise, it is targeting to increase the share of outsourced components from 23 per cent current to 35 per cent from cost-efficient (emerging) markets in the medium-term. Among others, a cut in fixed marketing and selling expenses are also part of the plan. In totality, expect costs at JLR to fall going forward; analysts estimate that these measures should help JLR save $400-500 million in costs on an annual basis in the medium term (12-18 months).

Local road getting smoother

Although the domestic business too was been impacted last year by the slowdown, it was not in as bad a shape as the JLR operations. Tata Motors’ standalone profit before tax was down 61 per cent to Rs 1,014 crore in 2008-09. Notably, certain segments including passenger vehicles (helped by higher sales at JV with Fiat) have reported decent y-o-y growth in sales volumes in the last 2-3 months, while the light CV (Ace range) sales continue to be robust (up 27 per cent in June 2009 quarter). The latter is consequent to a better demand for LCVs(partly due to a shift in hub-and-spoke model adopted by transporters; LCV for intra-city and M&HCV for inter-city or national highways).

The biggest business, the medium and heavy CV (M&HCV), however continues to experience a decline in sales down 23-26 per cent for the June 2009 quarter.

Going ahead (from second half of 2009-10) and in general, the company hopes to do better on the back of economic recovery, infrastructure activities and advanced purchases ahead of emission norms change from April 2010. A benign interest rate regime should also help. “We expect that while M&HCV trucks may witness moderate growth, LCVs would continue to show good growth driven by continued success of ACE Truck and ACE Magic,” says a company spokesperson. Demand for buses is also expected to be strong due to increased buying from governments; orders for over 14,000 buses are expected to be awarded to various companies. Likewise, the passenger car business will see traction from sale of Nano vehicles, launch of a Tata-branded sedan and full year sales of Indica Vista (launched in last fiscal) besides sale of Grande Punto, Linea by Tata Motor’s venture with Fiat. Thus, total car volumes are expected to jump by over 30 per cent in 2009-10.

THE JLR BURDEN
in Rs crore	CONSOLIDATED ^		JLR FY09
	FY08	FY09
Net sales	35,660	70,939	39,616
EBIDTA	4,249	2,197	-520
EBIDTA (%)	11.9	3.1	-1.3
Other income	267	799	192
Net interest exp	743	1,931	248
Cash profit	3,773	1,065	-576
Profit before tax	2,925	-1,790	-2,249
Net profit*	2,168	-2,505	-2,449
* after share of minority interests & profit and loss in respect of associate companies ^ Financial performance not comparable largely due to addition of JLR since June 2, 2008

International sales stabilising?

Analysts estimate that sales of JLR vehicles in the US and the European markets are still on a decline (in current year, till date). Quoting a J D Power forecast, a Citi report indicates that SUV (Land Rover category vehicles) production in North America and Western Europe will fall 33 per cent and 17 per cent, respectively for calendar year ending December 2009. Although they are expected to start rising from 2010 onwards, it could take time (till 2011 or beyond) before sales reach 2007 levels.

The company, on its part, has drawn up plans to launch various products across regions and categories. While it launched the JLR brands into India on June 28, there are plans to globally launch the new Jaguar XJ in July 2009 and LRX Concept (a new small Range Rover). These launches along with thrust on emerging markets and a low base-effect could help JLR report almost flat sales growth in 2009-10, believe analysts.

A few weeks ago, Tata Motors also launched the ‘world truck’ range of ultra-heavy CVs from the Tata Daewoo stable, which should provide a boost to its Korean sales. Despite the downturn, the company looks determined to grow its businesses with new products and variant launches across different markets and all categories.

Outlook

It will be 4-6 quarters before the global economic outlook improves to levels that would help JLR achieve break-even sales, say analysts. To its advantage, the domestic business is doing better and the anticipated revival could provide a cushion to the consolidated performance. Additionally, lower raw material prices should also add to margins. And, gains from cost-cutting measures and better cash flows, undertaken by JLR should help hasten its recovery. Analysts expect the company to report a significantly lower consolidated loss (estimates range Rs 600-900 crore) in 2009-10.

Nonetheless, in light of the combined product development expenses and capital expenditure they expect cash flows to be muted. Hence, given that Tata Motors has debt repayment obligations of Rs 8,150 crore over next 21 months (Rs 1,800 crore in 2009-10; total adjusted debt-equity of over 4:1 currently), it may need to go in for a significant equity dilution, apart from divestment of investments. In this background, at Rs 300, the stocktrades at an expensive valuation of 28 times its estimated standalone EPS for 2009-10.