Tata Motors: An “Extraordinary” tale of multiple challenges?

The company has faced several headwinds over past 2-3 years due to a difficult operating environment for JLR

Aug 01, 2018 06:08 IST India Infoline News Service

Tata Motors
Tata Motors Limited (TML), one of India’s largest automakers and proud owners of British luxury carmaker, Jaguar Land Rover (JLR), is currently facing an uphill task. The challenges are multi-fold; difficult operating environment for JLR, mounting exceptional items every quarter, forex loss, phase-out of its older models and now, a demand postponement in China. In these difficult times, the standalone business was the only silver lining. However, even that business could now face headwinds by way of revision in axle load norms for trucks in India.

Things seem to be much better back home (standalone business), where volume growth has been extremely encouraging. While commercial vehicle (CV) portfolio has benefitted from the sector upswing, passenger vehicles (PV) have been riding on strong sports utility vehicle (SUV) sales. What could spoil the picture maybe, is the recent modification in axle load norms for trucks. Demand could get adversely impacted if existing trucks start carrying greater loads. However, there is confusion surrounding exact implementation of the norms, and hence most CV players are preferring to wait till further clarity emerges.

JLR’s tale of woes began when the company faced issues with regards to its diesel portfolio in UK and Europe. Brexit added to the clamour with uncertainty surrounding the transition. Addition to this was the recent trade trade-off between USA and major global economies; wherein global luxury carmakers slashed profit estimates or issued profit warnings. While cash flows have been under pressure, JLR has to continue investing in new product development, R&D and product refresh, since some of its models are more than half a decade old. In short, the company seems to be sinking deeper and deeper into troubled waters, with recovery seemingly far away.

We take a look at some of the exceptional items that have hounded the company for past 16 quarters:

Cons. EO income
 / (expense) (Rs Cr)
Comment on Extraordinary items
Q1FY19 - No EO during the quarter, however performance impacted by China sales deferral, dealer inventory reduction and lower operating leverage
Q4FY18 -1,642 EO comprised of capitalization of product development cost, policy aligned with global peers
Q3FY18 - -
Q2FY18 - -
Q1FY18 3,620 Credit related to amendment of Defined Benefit scheme of JLR. Retirement benefits to be calculated on career average basis rather than an employee's final salary salary at retirement. This resulted in inflow.
Q4FY17 -81 Includes exceptional credit related to insurance receipts w.r.t. an explosion at a port in China. Exceptional expenses relate to provision for inventory of BS-III vehicles
Q3FY17 716 Impact of Tianjin recoveries
Q2FY17 -11 Unfavourable FX revaluation of current assets and liabilities and one-time provision for new customer quality programmes
Q1FY17 491 Received payment related to Tianjin incident
Q4FY16 560 Exceptional income from insurance proceeds related to Tianjin incident. Exceptional expenses related to recall in USA of potentially faulty airbags supplied by Takata, a company that supplies airbags to JLR
Q3FY16 136 Received payment related to Tianjin incident
Q2FY16 -2,537 Expenses related to explosion at Port of Tianjin in China
Q1FY16 -9 Expenses related to employee separation
Q4FY15 -93 -
Q3FY15 - -
Q2FY15 - -
Source: Company Data, IIFL Research

As the above table demonstrates, TML has been faced with a unique situation after every few quarters. There are some incidents, whose effect cannot be immediately quantified in Rupee terms viz. nervousness surrounding Brexit and ongoing trade war between major global economic powerhouses. However, the sum effect of all these conditions has been reflected in its stock price, which has taken a heavy beating over the past several years.

1M 3M 6M 1Y YTD 2Y* 3Y* 5Y*
Stock return -2% -22% -34% -41% -39% -27% -12% -2%
Source: Ace Equity; We have assumed closding price of July 31, 2018
Note: M – Month, Y – Year, YTD – Year-to-date. *CAGR return for time period more than 1 year

There lies no clear cut answer to the question that many investors have been asking – when will the tide turn for TML? The management, on its part, has laid out a plan, detailing the steps they will be taking to reverse fortunes for the company. However, for the plan to materialize, macro-economic factors, too have to fall in-line. Investors will have to keep faith with the management and stay put over the longer term for this exceptional company to starting delivering. 

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