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FAT PROPHETS: Tata Motors (NYSE: TTM, initial buy $34.56), owner of Jaguar Land Rover PLC and a Global Opportunities Fund constituent, last Friday reported a surprise loss in its latest quarter. Initially the shares were weak in trading but after the market had time to digest the latest numbers the shares steadied and finished the day higher. The ADRs have been resilient over the past week, rising approximately 3%.
Tata Motors’ fiscal year ends March, so the recently reported quarter to 30 September 2015 was the company’s fiscal 2016 second quarter. The automaker reported a consolidated net loss of Rs4.3 billion (~US$66m), compared to a profit of Rs32.9 billion in the prior corresponding quarter. This was well below the Thomson Reuters polled net profit forecast of Rs20.4 billion.
Tata Motors was added to the Global Opportunities Portfolio at around $30
While a slump in China sales from the Jaguar Land Rover business weighed on profits, it was a one-time exceptional charge related to damaged vehicles that really torpedoed the reported numbers.
Jaguar Land Rover (JLR) took a one-off charge of £245 million in the last quarter, after around 5,800 of its vehicles were damaged in the Tianjin port explosion. Cue tears from Top Gear fans…
Although the company has taken the hit now, there will likely be material insurance compensation, and any recoveries will be realised later. Ultimately though this swung JLR into the red, reporting a loss to the tune of £92 million, compared to a profit of £450 million in the second quarter of the prior year.
Backing out the exceptional items, the picture was considerably brighter, with Tata Motors’ consolidated profit before tax (PBT) standing at Rs15.38 billion, compared to the reported loss before tax of Rs11.15 billion.
Tata Motors domestic Indian business narrowed its after tax loss to Rs2.87 billion versus a larger Rs18.46 billion loss in the prior corresponding period. There are green shoots emerging in the laggard Indian business, with passenger car sales rising 5.2% year on year as the company has upped its game in terms of its model range for the domestic market.
Tata has maintained its strong positioning in the commercial market, and growth here is picking up strongly. Medium and heavy commercial vehicle (MHCV) sales logged strong growth, with MHCV truck sales up 36.9% and MHCV buses up 22.5%. Combined with cost reduction measures, local operational performance is picking up.
In 2Q16 the EBITDA margin improved 8.4 percentage points to 6.8% and generated Rs7.09 billion of positive EBITDA, compared to negative Rs1.42 billion the prior year. Although JLR represents the lion’s share of Tata’s value, we are pleased that management is increasing its efforts to move the domestic business into profit. We believe this will stand the company in good stead over the medium to longer term as the Indian market has enormous potential over the next couple of decades. Scale improvements should pay dividends going forward.
Jaguar Land Rover though remains key to the fortunes of Tata Motors’ shares and although margins got crunched in 2Q16 compared to 2Q15, it was positive to see strong sales in the UK, Europe and North America take up the slack from weak China sales as we had expected. We believe the British marque’s line up over the next couple of years is top notch and will resonate well with customers globally.
JLR retail unit sales slumped 32% in China during the second quarter, but rose 34% in Europe and 23% in North America on the back of demand for models such as the Discovery Sport.
JLR sales have got away to a strong start in the current quarter, with retail sales up 24% year on year to 41,553 units, with Jaguar retailing 7,467 units, up 39% and Land Rover retailing 34,086 units, up 21%. The sterling October performance was reportedly driven by a positive market response to the Jaguar XE and the Land Rover Discovery Sport. Positively demand was strong across regions, with North America starring.
The elephant in the room for Tata Motors’ Jaguar Land Rover (JLR) business is China as many have forecast very weak sales from this market far into the future. While acknowledging growth is likely to slow from the breakneck levels of the past, we believe the consensus view that has formed over the past six months is too pessimistic and underestimates the rebalancing of the economy (to being more consumer led) that should pan out over the next 5 to 10 years.
Discussing the backdrop in the world’s largest car market, Jaguar Land Rover chief executive Ralf Speth said at a news conference in Mumbai: “We are optimistic that the car market in China is going to grow and within that, the premium car market is going to grow.” Ralf, we concur.
Tata Motors ADRs are now up around 11% over the past month and have risen over 40% from their recent 52-week low. That the shares have continued to push north in recent trading following a relatively weak set of fiscal second quarter results suggests to us that the market is beginning to share our view that the company’s challenges are short term in nature, rather than structural and realise the stock has been oversold.
We believe considerable value is on offer for those willing to look out twelve months or more in the future with Tata shares currently trading on a projected EV/EBITDA multiple of circa 3.4 times.
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