Tata Motors’ financials continue to struggle on a consolidated basis due to JLR. The luxury carmaker faces an unwieldy future due to years of reckless expansion and poor strategic planning.
Tata Motors recorded the largest ever quarterly loss in India’s corporate history in Q3, 2018-19.
The loss is linked to a one-time impairment charge in its subsidiary JLR.
While Brexit is a potential crisis looming for JLR, missteps by the top leadership over the years have left the company struggling.
The company needs to take urgent steps to adapt its product portfolio to gasoline and electric vehicles and diversify beyond the decelerating Chinese market.
Auto major Tata Motors has earned a dubious record in the quarter ending December 2018 with a consolidated loss of Rs 26,992.54 crore. This is the largest quarterly loss in India’s corporate history, beating IOCL’s loss of Rs 22,450 crore in the quarter ending June 2012.
As a result, the company’s stock dropped steeply to 30% today. Tata Motors has not witnessed an intra-day loss of this scale since February 1993.
On a standalone basis, Tata Motors fared much better. Profits grew by three times yoy to reach Rs 618 crore, and standalone revenue was recorded at Rs 16,477 crore, a growth by 1.85% yoy.
Guenter Butschek, CEO and MD, Tata Motors, commented on the results, “Fiscal year 2019 so far has been a challenging period for the industry. Despite the muted growth, Tata Motors has delivered strong results, registered an impressive profitable growth this year on the back of exciting products, renewed brand positioning and aggressive cost reduction.”
NOT US IT’S JLR!
The scale of the loss has been attributed to a one-time impairment charge for Tata Motors’ subsidiary Jaguar-Land Rover. The write off for JLR is attributed to the slowdown in China sales, impact of shifting trends to eco-friendly hybrid and electric vehicles and rising debt costs.
Sales of JLR have been falling every month, and reached 144,600 units in the quarter, a drop by 6.4% yoy. The situation in China is much worse, where sales were 47% lower on a yoy basis, This offset the increase of 21% and 18.4% in North America and the UK respectively.
In China, JLR faces stiff competition, economic slowdown as well as issues with its distribution network. The company admitted that just around 18% of its dealer outlets are in tier 1 locations like Shanghai and Beijing and around a third are open for three years or less. It is now scaling back on its deliveries and rehauling the operation.
JLR recorded a loss for the third quarter in a row, with net sales dropping by 1% and volumes declining by 11% yoy. EBITDA margin fell by 180 bps to 7.3%, due to one-off de-stocking and warranty costs. JLR’s revenue was at £ 6.2 billion, while the losses stood at around £ 3,129 million.
Another major issue highlighted by JLR is the possibly negative implication of Brexit, which would change the tariff structure and also necessitate changes in the manufacturing/sourcing strategies. Notably, the management has not factored in a no-deal Brexit.
Ralf Speth, CEO, JLR had commented earlier that a no-deal Brexit would put thousands of jobs in the UK at risk. He even expressed doubt whether JLR’s plants would continue to run after the deadline of March 29, 2019.
PERILS OF OVERCONFIDENCE?
JLR has embarked upon a Charge and Accelerate programme to create an efficient and resilient business. In January, JLR announced plans to attain investment, working capital and profit improvements of around £ 2.5 billion by March 2020. This would entail laying off 4,500 people from its workforce and a one-time exceptional redundancy cost of £ 200 million. It has already laid off around 10% of its workforce.
The company keeps talking about the Brexit issue, and how it could disrupt JLR’s supply chains. But it has larger problems to face. Bernstein analyst Robert Zhu accuses JLR of running too far and too fast. The major sins of the management are overreliance on China, excess capacity and entering too many product segments.
Passenger vehicle sales in mainland China have fallen by 5.8% in 2018 to reach 22.35 million, which is the first decline since 1992. This necessitates a change in strategy. It also has too many products in its portfolio, which dilute its competitive strengths vis-a-vis German rivals like BMW.
Around 90% of JLR’s sales in UK (its largest market) are diesel. With a huge political outcry against diesel cars in Europe, JLR has an uphill task unless it quickly shifts to gasoline and electric vehicles.
It has to incur huge investments to correct the wrongs in its product portfolio. Due to its weak ratings, even costs of debts are rising. The yield on its 4.5% bond that’s maturing in 2027 is nearly 9%.
After years of reckless expansion and misplaced strategic priorities, it’s time for JLR to reflect, adapt and reconsider its roadmap for the future. Brexit is only a part of the problem for the luxury auto maker, which is little more than a white elephant in Tata Motors’ stable at present.
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