TATA MOTORS - TOUGH ROAD AHEAD

“Ford sold us JLR during tough times. In the light of business significantly deteriorating, we should perhaps give JLR some time and, if it is unable to perform still, look at divesting it.”

This is what one of the shareholders commented during Tata Motors’ 73th Annual General Meeting held in August 2018.

During that AGM, many shareholders asked Tata Motors to consider divesting its stake in JLR as they feel that Tata Motors has been putting most of its profits back into JLR, while shareholders have not received dividends for about three years. The last dividend was in 2016 – 10% dividend.

There is no doubt that JLR was the main growth driver for Tata Motors till the pain in China began. While its Indian operations meandered, it was JLR alone which helped it sail through. At that time, all the Tata Motors shareholders felt vindicated that the expensive buyout was finally paying up rich returns.

But in current fiscal, in Q1FY19, the company posted a consolidated net loss of Rs.1902 crore and the main culprit was the weak performance of JLR. JLR revenue was down 7% (YoY), mainly due to sales deferral in China and planned dealer stock reduction in other markets. In Q1, JLR invested £1.1bn on new product development and new vehicles. This investment, combined with the working capital outflow of £1bn led to negative operating cash flow of £1.7bn in the first quarter.

And once again, in current Q2, the company posted a consolidated net loss of Rs.1049 crore as weakness in JLR continued, which posted a loss at net levels. Revenue for China JV dipped 44% (YoY) and in almost every geography it underperformed the industry growth.

In Q3FY19, the same story continued, only this time around, the loss was much higher. Consolidated net loss was at a shocking 26,992 crore. JLR, once again reported a poor show on all fronts – revenue, EBITDA and net profit and there was the huge JLR impairment expense.

Most of the brokerage houses are bearish on the stock, with many giving a sell call and cutting price target. Various reasons are cited - weak demand outlook for JLR, a margin guidance cut, Brexit fears, JLR faces headwinds such as China slowdown, continuation of de-stocking costs in March quarter too.

The silver lining here – Indian operations have been holding up. In current Q3, it posted a PAT of Rs.618 crore and market share in CV was up 60 bps while PV was up 50 bps.

But Indian operation alone does not have the strength to push the consolidated bottomline into profit. The pain is expected to continue into Q4 too. The company has said, “As part of its plans to achieve £2.5 billion of investment, working capital and profit improvements by March 2020, Jaguar Land Rover announced in January that it would reduce its global workforce by 4,500 people. This is expected to result in a one-time exceptional redundancy cost of around £200 million. The EBIT margin for the full financial year ended March 2019 is expected to be marginally negative which will result in a loss before tax for the year before exceptional items.”

Does this mean that company should pay heed to shareholders and divest? In fact the voices will only grow after this current loss and expected loss for FY19. But let us not forget that the same shareholders reaped a rich dividend when JLR was delivering. Currently, the headwinds are tough.  

The road ahead for JLR is uphill, mainly with Brexit, leading to an uncertain demand environment in Britain and Europe. Whether the shareholders like it or not, dividend or not, the company will have to continue making investments in new product development – that’s the only way JLR will remain relevant.