News Analysis

Tata Motors bears brunt of China slowdown

Parvatha Vardhini C BL Research Bureau | Updated on February 07, 2019 Published on February 07, 2019

JLR’s substantial loss not offset by profit in Indian market

For the third straight quarter this fiscal, Tata Motors has posted weak numbers, clocking a consolidated loss of ₹26,961 crore for the three months ended December 2018. In the June and September quarters, the company had incurred losses of ₹1,000-1,800 crore.

While the domestic standalone business made profits of ₹618 crore in the December quarter, the huge loss came from writing down of the value of certain product development costs that were capitalised as well as the value of certain tangible assets such as property, plant and equipment at Jaguar Land Rover (JLR). This writedown was done to the extent of £3.1 billion ( ₹28,014 crore).

On slippery wicket

However, even without considering this exceptional charge, JLR was on a slippery wicket, clocking a loss before exceptional items of £273 million (approximately ₹2,500 crore). Like in the previous quarters, the downturn in China took a toll on the company in the third quarter.

While JLR clocked good retail volume growth (over Q3 FY18) the quarter) in North America and Europe, the company reported a 6.4 per cent drop in total retail sales during Q3 FY19 due to a steep drop of 47 per cent in China volumes.

Thus, JLR revenues fell about 1.4 per cent year-on-year to £6,223 million (approx ₹57,300 crore). Its Ebitda margins dipped to 7.3 per cent this time, compared to the 10.9 per cent clocked a year ago.

High depreciation and amortisation costs, high incentives in China to push up sales and production shutdown during the quarter were the main reasons for the shrinkage in margins.

Outlook

While the long-term potential for premium cars in China remains sanguine, the slowdown in China could continue to impact JLR in the near term. The company is trying to make the best out of the situation there by focusing on improving dealer profitability, narrowing discounts as well as enhancing local sourcing.

Besides, JLR is focussing on bettering its cash flows and profitability. The latest impairment of certain assets, for instance, is expected to bring down depreciation and amortisation costs by £300 million (approx ₹2,600 crore) per annum. Similarly, to cut down employee costs, JLR announced a workforce reduction scheme with a target of cutting down 4,500 workers last month.

Product mix

These apart, a better product mix could do its bit to drive sales in the coming months. The company is launching the all-new Range Rover Evoque, which comes with mild and plug-in hybrid options. The Jaguar I-PACE, introduced in 2018 in select markets, is now launched globally and sports an encouraging order book. A new Defender will also be launched this year.

A ‘No-deal’ Brexit, though, remains a dampener as it could impact the import of components into UK for manufacturing, as well as the export of vehicles to global markets.

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