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Worries pile up for Tata Motors' investors; analysts have downgraded stock

Shally Seth Mohile/Mumbai 11 Feb 19 | 08:56 PM

Investors in Tata Motors are worried after a quarter that was marked by high impairment charges, steep volume contraction in China and uncertainty around Britain’s exit (Brexit) from the European Union.

The company reported a loss of Rs 26,697 crore in the December quarter; this is the biggest one ever reported by a corporate entity in India. It was on account of a £3 billion write-off at UK-based Jaguar Land Rover (JLR) and a disappointing performance in China, where volumes fell by more than half over the year-before quarter.

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“The write-off was inevitable, given sharp deterioration in growth and profitability outlook for the industry. We would have liked this to be followed by a change in the company’s R&D (research and development) capitalisation policy, too. JLR capitalises 70-80 per cent of its annual R&D spends, higher than its premium car peers," wrote Amit Mishra and Indarpreet Singh, analysts at Macquarie Research. 

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Tata Motors has, since acquiring JLR in June 2008, been spending upward of £2 billion annually on its UK subsidiary. In recent years, above £3 billion. The company had previously said it expected £4.5 billion in capital expenditure (capex) for 2018-19, the highest ever; this has now been pared to below £4 billion.

It has also been capitalising the expenses at a rate higher than peers; the latter’s average rate is 25-40 per cent. Analysts fear if the company doesn’t lower this rate, it may have to take more write-offs. A change in capitalisation policy and allowing it to pass through the profit and loss account will make the management more accountable and prudent in spending, it is believed. “They have to really streamline their R&D and need to be a lot more efficient with spending," said an analyst. He said the capitalisation policy had been an area of concern for some years. While one understood the logic in the initial years of acquisition, as JLR needed high investment, the rate should have been gradually tapered as part of good accounting policy, he said, declining to be identified.

Anticipating more pain ahead for JLR, most analysts have cut their earnings per share (EPS) target, also paring their volume and growth forecasts. The turnaround effort would have only limited success in a weak operational environment, they said. And, demand reversal in the truck business in India might also weigh on domestic operations.

“While steps at clean-up and cost control are visible, results could take much longer," wrote Nitesh Sharma, analyst at PhillipCapital, in a post-earnings announcement research note. The brokerage has sharply pared its target price for the stock (uptill where they think it could go) to Rs 290, from Rs 200 earlier.

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Emkay Global has trimmed company’s EPS by 46 per cent for FY19 and 19 per cent each for FY20 and FY21. The brokerage has also downgraded the stock to ‘hold’, from ‘buy’. The downgrades are based on lower margin and volume assumptions in China, wrote N L Raghunandan and Mumuksh Mandlesha, analysts at Emkay Global. They caution that in the event of a no-deal Brexit, there could be further cuts. They expect JLR’s free cash flow to remain negative, despite cost curtailment efforts, owing to the large capex requirement.

Tata Motors has said it expects a capex for JLR of less than £4 billion for the current and next financial years. Tata Motors shares closed at Rs 152.45 at the BSE on Monday, up 0.8 per cent from the previous trading day.

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