Tata Motors out of earnings downgrades, but volume headwinds may persist

ET Intelligence Group: Tata Motors will likely negotiate fewer speed-bumps, but the country’s biggest automaker hasn’t turned the corner just yet.The earnings downgrade cycle may take a breather, but volume headwinds will continue capping the stock’s upside potential.It has outrun its cost savings guidance in the past few quarters. The company’s concentrated effort to cut the flab and institutionalise structural changes helped post positive operating profit at a time when volumes are less than half of the normalised level — both at home and overseas.Tight control on costs helped Jaguar Land Rover to post positive operating profit margins (EBITDA) when the Street was estimating operating loss in the previous quarter. Project Charge Plus, the cost control programme of JLR, resulted in cost savings of 1.2 billion in the June quarter; out of this, 400 million are structural in nature. Buoyed by the success of Project Charge plus, JLR has raised its cost-savings target by another 1.2 billion to 2.5 billion for the current fiscal year. Total savings in the project are estimated at 6 billion in the full cycle, from an earlier estimate of 5 billion.The break-even point is now below half a million units from 6 lakh units last year and with aggressive cost savings plans, this number is further expected to go down in the coming quarters. The reduction in structural costs will ensure a lean structure.Besides cost control, higher realisation per car, government grants and favourable currency movement supported JLR margins.77324939On the volume front, the booking of the new Defender has been quite encouraging for JLR and it has received a total order of 30,000 units so far. Defender is the only model out of the total 14 that recorded volume growth in the first quarter. The pace of recovery in the developed markets will hinge on the extent of greater stimulus from governments. The Street is pencilling in volume contraction of 10-12 per cent for FY21.Back home, the volume picture is bleak – even dimmer than that for JLR. It saved around Rs 1,020 crore in costs. Consequently, the operating loss was lower than analysts’ estimate. The commercial vehicle segment, which has been a cash cow, witnessed an 89 per cent volume drop. The margins of the CV business were negative 40.3 per cent in the June quarter compared with 8.6 per cent a year ago. Volume recovery is likely to be slower than the rest of the vehicle categories, particularly in the heavy truck segment.Passenger vehicle margins dropped to negative 14.5 per cent in June against 1.2 per cent a year ago. On a full-year basis, the operating loss could be in the tune of Rs 500-1,500 crore for the domestic operations.

from Economic Times https://ift.tt/3hZMoB7