Tata Motors tumbles on JLR margin warning

Moneycontrol Bureau

Tata Motors shares plunged over 9 percent on Thursday morning after the company warned that while third quarter revenue at its luxury Jaguar Land Rover unit will be higher than in previous quarters, margins are likely to be impacted due to several reasons including unfavourable forex rates and higher mix of low-margin Evoque SUV.

"Based on present management estimates and subject to confirmation by the results announcement to be made in Feb, we expect that for the quarter ended 31 Dec 2012, revenue will be higher than the previous two quarters reflecting the higher sales volumes. EBITDA is likely to be in the region of levels reported for the previous two quarters and EBITDA margin is likely to be slightly lower than in the previous two quarters, primarily reflecting less favorable exchange rates, the ongoing effect of a higher mix of Evoque sales and other factors," the India's largest commercial vehicle maker said in an investor update late on Wednesday.

Further, free cash flow, that is cash from operations after capital spending, is also expected to be negative in the quarter.

Tata Motors has forecast a total capital spending of about USD 2 billion pounds by JLR in the current financial year. This will include 50 percent towards research and development and the rest will be expenditure on tangible fixed assets such as facilities, tools and equipment.

In FY2014, JLR's capital spending is expected to go up to USD 2.75 billion, which could mean negative cash flow next year as well.

Separately, the company in a notice to stock exchanges announced that JLR would raise USD 400 million through issue of bonds to support its operational costs and future growth plans. 

Despite the sluggish growth in the domestic business, Tata Motors shares have had a stellar run this financial year driven by JLR. But this margin warning by the company and the negative cash flow forecast has taken the street by surprise and has raised concerns that the road ahead for JLR may not be as smooth as expected.

"We place our estimates and target price under review pending further analysis. We believe Tata's share price could react negatively in the near term as a result of the announcement and increase in capex guidance," Goldman Sachs said.

Other brokerages too gave a big thumbs down to Tata Motors post this announcement.

"Given that adverse currency movement and a weak product mix (led by Evoque) are the primary factors driving down margins, the pain may spill over to FY14. Benefits of ramp-up in Range Rover may be negated by adverse currency, increased incentives, and lower margins on Range Rover Sport before the introduction of the new model. We see EBITDA getting cut by 7-10% with a higher cut at the PAT level due to increased debt," IDFC said in its assessment.

Further IDFC says that the negative free cash flow for FY14 is a "major dampner" considering the poor cash flow generation in the domestic business.

It also questioned the merit of JLR paying 150 million pound dividend to Tata Motors in the second quarter if its capital expenditure was expected to rise.

At 9:45 hrs, Tata Motors shares were trading at Rs 289.70, down 7.5 percent on NSE.