Challenging Market Conditions For Jaguar Land Rover Continue To Dampen Tata Motors’ 2018 Performance 

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Tata Motors (NYSE: TTM) released its fourth quarter and full-year 2018 results on May 23rd. The company’s performance for the financial year continued to be weighed down by the underperformance of its Jaguar Land Rover (JLR) division due to the prevalent challenging market conditions in its key regions. This consequently led to an 80bps decrease in the company’s consolidated EBIT margin. However, on a brighter side, the company’s home brand displayed significant strength, reaping benefits from the company’s turnaround strategy and a favorable regional market environment. Overall, the company reported a 9% year-on-year (y-o-y) growth in its full-year revenue with its profit before taxes (PBT) increasing by 20%.

Tata Motor’s most valuable JLR division has been experiencing weak demand in its key regions of the U.K and Europe as a result of lower consumer confidence in diesel vehicles with increasing regulations. A shift in consumer demand toward electrification has also resulted in an inherent weakening of the overall market. The company’s retail and wholesale sales for the year increased marginally by 1.7% and 2% y-o-y, respectively, with the introduction of newer models and stronger sales growth in China offsetting the impact of a weaker demand in its western regions. Additionally, declining volume sales led to increased incentive spending by the company which weighed on the company’s margins. EBIT margin for the JLR division was down by 400 bps compared to the same period last year.

Fortunately, the company’s home brand displayed significant strength, experiencing y-o-y wholesale volume growth of 17% and EBIT margin improvement by 400 bps. Volume and margin growth was positively impacted by the company’s turnaround strategy which focused on “filling up portfolio gaps and rigorous cost reductions.”  Additionally, the company’s home market has remained favorable throughout the year, with the government’s push towards infrastructure development and an increase in vehicle demand for e-commerce and Fast-Moving Consumer Goods (FMCG) applications aiding demand.

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Looking forward, the company intends to maintain its high capital spending on its JLR division with its quest towards electrification with a focus on the introduction of newer models with an enhanced technology. Although JLR expects better sales volume in Fy19, the company’s profitability may continue to remain weak as increased capital spending has increased the company’s debt to a significant level and is expected to grow further. The company aims to spend £4.5 billion (approx $6 billion) in investments in the current financial year, 7% higher than Fy18. Thus, profitability is likely to display gradual improvement over the years, unlike sales.

 

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