INSUBCONTINENT EXCLUSIVE:
ET Intelligence Group: The sharp improvement in the operating margin of Jaguar Land Rover (JLR) in the September quarter may rekindle
investor interest in Tata Motors in the near term
The second-quarter performance could result in an earnings upgrade driven by the reset of margin expectations at UK subsidiary JLR
But analysts are likely to have a calibrated view owing to several variables
This includes events such as Brexit and others linked to an uncertain global economic environment
The company needs to mirror this performance for a few more quarters to build a case for sustainable re-rating and regaining the historical
quarters, thanks to a recovery in China, favourable product mix and cost savings
The efforts to improve sales in China are yielding results
JLR volume outperformed by 30% in the September quarter compared with 15% underperformance in the previous one
China accounted for 20.3% of total retail sales in the second quarter of the current fiscal, a gain of 1.3 percentage points on a sequential
The inventory of China retailers dropped to the lowest since 2017 and returns on sales for retailers improved.
Volumes and margins have
been volatile in the past few quarters following the slump in car sales growth in China and its moderating economic growth outlook
Therefore, a single-quarter improvement may not move the needle for investors
Besides this, the uncertainty of Brexit still looms large
JLR said in a post-earnings conference that it might order another shutdown in November due to Brexit.
A substantial contribution from
The company will continue with the second round of the cost-efficiency programme once the first phase is over by March 2020
Under Project Charge, savings are being made from manufacturing, material and fixed marketing expenses
Also, JLR has been gradually reducing its warranty expenses, and expects this to remain at 4-6% of the total on a sustainable basis going
forward.
The impact of the cost saving can be gauged from the fact that in the previous quarter JLR sold 118,000 units, resulting in
operating profit (Ebit) dropping 5.5%
With delivery on cost savings quite visible in the financials and looking sustainable, the street will start pricing in double-digit
operating margins (Ebitda) for JLR in the next fiscal year.
The company has guided for Ebit (including depreciation) margin guidance of 3-4%
for the current fiscal, while Ebit margin for the first half has been 0.2%
Thus, achieving its guidance would still be an uphill task despite significant outperformance in the second quarter.
