Tata's performance on key metrics has deteriorated as its standalone business continues to underperform.

​​IHS Markit perspective

• Significance: Tata Motors posted an increase of 41.6% in its consolidated profits for the latest quarter ended 30 June 2017 on the back of one-time income from JLR.
• Implications: Slowing sales growth and rising cost pressures in the luxury division mean Tata Motors' consolidated operations are now more vulnerable amid underperforming standalone business.
• Outlook: Going forward, JLR is likely to benefit from strong product pipeline, including the new Range Rover Velar and Jaguar E-Pace. For Tata Motors, the eyes will be on the Nexon compact crossover.

Tata Motors posted a rise of 41.6% year on year (y/y) in its consolidated profits for the first quarter of fiscal year (FY) 2017/18. In a statement, the automaker said that its consolidated net income totalled INR32 billion (USD482.2 million) in the quarter, reflecting a strong contribution by its Jaguar Land Rover (JLR) luxury division. However, consolidated revenues were down 9.9% y/y to INR586.5 billion. Operating profit (EBITDA) followed the lead of revenues and declined 41.6% y/y to INR57.8 billion. As a result, EBITDA margin fell 9.9% during the latest quarter, down from 15.2% in the same quarter last year. "Our focus on topline, market share growth, major cost reduction initiatives and efficiency improvements have been significantly enhanced and accelerated in the last few months," said Gunter Butschek, managing director of Tata Motors.

Like earlier quarters, the automaker's standalone business remained under pressure during the quarter and posted a loss of INR4.7 billion, compared with a small profit of INR260 million in the same period last year. The business's revenues declined 11.4% y/y to INR92.1 billion during the quarter, as sales volumes slipped 11.8% y/y to 111,860 units. More importantly, it was high-denomination medium and heavy commercial vehicles (MHCVs) which registered sharpest decline of 34.8% y/y in domestic sales to 23,142 units while light commercial vehicle (LCV) deliveries increased marginally to 43,255 units. Although passenger vehicles softened the blow with an increase of 4.7% y/y to 35,931 units in the domestic market, a 31% y/y decline in combined export volumes to 9,532 units more than offset the gains.

Meanwhile, the automaker's luxury division, Jaguar Land Rover (JLR), reported net earnings of GBP472 million (USD699.7 million) during the quarter, an increase of 55.3% y/y. The division's revenues during the quarter grew at a modest rate of 4.6% y/y to GBP5.6 billion. JLR's retail sales, including its Chinese joint venture (JV), came in at 137,463 units during the quarter, up 3.5% y/y, thanks to strong demand across the product portfolio, primarily reflecting higher volumes in China and North America. JLR's volumes were driven by strong sales of the F-PACE, Range Rover, and Discovery Sport.

Outlook and implications

As mentioned above, earnings during the latest quarter were propelled by the one-time gain of INR36.1 billion relating to the changes made to JLR pension plans. Nevertheless, the luxury division - which has shielded Tata Motors' standalone business in the past - has also come under pressure now. Higher material costs and variable marketing expenses, particularly in the US market caused the luxury division's EBITDA margin to fall 460 basis points to 7.9% in the latest quarter. During the latest quarter, wholesale deliveries contracted 2.4% (excluding Chinese JV) to 117,916 units.

Domestically, the standalone business has continued to drag on overall performance. There has been a mini revival of sorts in passenger vehicle sales but MHCVs - which are high-denomination products - shipments registered deep cuts in the latest quarter. Playing an important role in this underperformance were government regulations and the volatility stemming from these policies. The nationwide introduction of Bharat Stage IV (BS-IV) emission norms from 1 April 2017 led to pre-buying by fleet operators which has resulted in weaker demand in the subsequent months. Similarly, buyers essentially adopted a "wait and see" approach ahead of the implementation of goods and services tax (GST) with effect from 1 July 2017.

Tata Motors' rival Ashok Leyland which has a greater higher focus on MHCVs, also posted poor financial performance for the latest quarter. Nevertheless, the situation is alarming for Tata Motors which has lost market share to its competitors. Efforts are under way to turn around the standalone business and these are greater accountability is being fixed. In internal communications, managing director Gunter Butschek has termed the loss of market share in the commercial vehicle segment as a crisis-like situation and departure of key executives has further disrupted the status quo. Elsewhere, some radical changes in human resources processes have been used to shake up the well-established reporting lines with the aim of injecting new energy and promoting fresh perspectives.

Going forward, JLR is likely to benefit from strong product pipeline, including the new Range Rover Velar which sold 1,731 units in its first full month. A further boost looks set to come in the shape of Jaguar's E-Pace which was revealed last month and looks set to add considerable volume for the brand. For Tata Motors, the upcoming launch of Nexon compact crossover will be an important development. Although its recent passenger vehicle launches have done reasonably well, the key to sustained performance lies with commercial vehicles.

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The above article is from AutoIntelligence Daily by IHS Markit. AutoIntelligence Daily provides same-day analysis of automotive news, events and trends.​​​​​ Get a free trial.