Tata Motors' Consolidated Results Show Profit in Q2 FY 2009/10, Helped by JLR

Tata Motors posted an improvement in its consolidated financial results during the second quarter of fiscal year (FY) 2009/10, according to a statement released by the automaker. For the three months ending 30 September 2009, its business operations saw a decline in revenues from 229.9 billion rupees (US$4.94 billion) to 211 billion rupees as its operating income slipped by 13.3% year-on-year (y/y) to 6.58 billion rupees and other income fell from 4.26 billion rupees to 4.07 billion rupees. However, the company's earnings before interest, taxation, debts, and amortisation (EBITDA) improved by 6.8% y/y to 15.92 billion rupees, and its EBITDA margin stood at 7.5% as opposed to 6.5% a year ago. The company also returned to profitability regarding net income, achieving a profit of 220 million rupees instead of the 9.42-billion-rupee loss seen during the second quarter of FY 2008/09. Part of this improvement was down to the business having cut its overall expenditure by 8.1% y/y to 204.4 billion rupees as expenditure on raw materials fell from 137.1 billion rupees to 119.3 billion rupees, although research and development (R&D) costs actually increased to 857.5 million rupees from 844.6 million rupees.

The second-quarter results have helped Tata's previously dismal year-to-date (YTD) financial status. For the six months ending 30 September 2009, its business operations recorded a small rise in revenues from 374.8 billion rupees to 375.0 billion rupees as operating income returned to profitability of 3.17 billion rupees, although this was still down by around 84.8% y/y. The company's EBITDAin the YTD has also fallen by almost a third to 21.88 billion rupees, and its EBITDA margin for the past six months is at 5.8% as opposed to 8.5% a year ago. The company remains in deficit with regard to its net earnings in the YTD to the tune of 3.07 billion rupees, down from the 2.22-billion-rupee loss recorded a year ago.

At the same time, Tata also revealed that its U.K.-based Jaguar Land Rover (JLR) unit booked an operating profit during the second quarter. According to figures, JLR achieved a profit of £41.3 million (US$68.2 million) in the period, compared with a £34-million loss in the previous quarter. It also managed to narrow its net losses to £60 million. The rise in profitability coincided with a quarter-on-quarter (q/q) increase in global wholesales of around 23% to 44,300 units, although retail volumes remained flat at around 47,100 units against 46,800 units, with Land Rover proving to be the stronger of the two. Overall, its sales revenues for the quarter stood at £1.42 billion. Tata's chief financial officer (CFO), C. Ramakrishnan, said that, "We see signs of stabilisation and improvement. Many of the cost reductions under way at Jaguar and Land Rover should benefit us in the coming quarters."

Outlook and Implications

Tata Motors had already announced that the situation at its standalone operations had improved compared with a year ago (see India: 27 October 2009: Tata Motors' Q2 Net Profit Doubles, Excluding JLR Brands), but with the publication of the automaker's consolidated results it is clear that the rest of the business is also seeing some improvement. This is partly thanks to the continued improvement in the global economy, which has seen demand for both passenger cars and trucks (at least in developing markets) recording gains. This has particularly been evident in Tata's most important market, India, where double-digit percentage gains have been seen in the past few months, helped by a low base of comparison and the launch of new models. These have included the ultra-low cost (ULC) Nano and, at the opposite end of its model line-up, the Prima heavy commercial vehicle (HCV) developed with its South Korean unit Tata Daewoo Commercial Vehicles (TDCV), as well as upgraded sport utility vehicles (SUVs) and light commercial vehicles (LCVs). The company also looked to continue the momentum that began with the Indica Vista when it launched the Indigo Manza in October. Gains are also being recorded in the premium sector around the world, although this has in the main been centred on developing markets. JLR has sought to capitalise on this with the launch of several upgraded models, including its Land Rover Discover, Range Rover and Range Rover Sport models, as well as the Jaguar XF and XK, which have undergone some technical enhancements, despite the former being less than two years old. The company will continue in this vein as it finally launches the latest generation of its Jaguar XJ model in January 2010, which was first revealed in July (see United Kingdom: 10 July 2009: Jaguar Land Rover to Be Profitable in Two Years, Says Tata Motors Vice-Chairman) and which has been used in many promotional tours to ensure that it receives the most exposure possible when it is finally launched.

However, more importantly, the cost-cutting strategy for the JLR side of the business already seems to have had a positive effect. It has been working with consultants from both KPMG and Roland Berger to reduce its expenditure, and this should become even more evident in the coming quarters. Tata has also worked on ways of using its available cash effectively, and the latest initiative will see vehicles being financed during the transportation process (see United Kingdom: 16 November 2009: GE Capital to Finance JLR Vehicles in Transit—Report), which should begin to have a positive effect on results during the third quarter. Its liquidity situation should also improve with the arrangement of a £175-million loan underwritten by the State Bank of India, while guarantees for its £340-million loan from the European Investment Bank (EIB) to support the development of "green" technologies will also improve the unit's liquidity. Looking to the future, Tata also plans to cut the number of plants it has in the United Kingdom and this could prove to be a massive driver of further profitability in future (see United Kingdom: 25 September 2009: Jaguar Land Rover to Shut One Plant by 2014, Confirms Production of LRX). However, Tata's overall debt is still extremely high, with Ramakrishnan saying that the debt on Tata's books has risen by 50% compared with the same period a year ago, and now stands at 220 billion rupees, with a debt-to-equity ratio of 4:1. Although much of the troubles at the company have passed, this will remain a constant source of pressure on the automaker, and although it aims to get this down to 1:1 eventually, it may well be some time before it realizes this goal.