Despite recording a consolidated loss of ₹8,444 crore for the quarter ended June 2020, the Tata Motors stock has gained over 5 per cent in trading so far today. The stock seems to be riding on the fact the the company managed to remain profitable at the operating level, recording a 2.6 per cent EBITDA margin, despite a 64 per cent year-on-year (y-o-y) drop in consolidated volumes as well as a 48 per cent y-o-y drop in consolidated sales. Results for the April-June 2020 period were announced after market hours on Friday.

However, this is at best a short-term cheer for the stock. Going forward, while global demand will continue to remain the wildcard, improvement in JLR’s profitability is vital for the stock.

Though both the India business and Jaguar Land Rover (JLR) suffered the impact of the pandemic, much of Tata Motors’ consolidated loss of ₹8,444 crore for the quarter ended June 2020 comes predominantly from the weak performance at JLR. JLR recorded losses of £648 million (₹6,354 crore approximately) during the quarter.

With JLR again slipping into the red in the March and June quarters of 2020, the pandemic has cut short JLR’s nascent return to profitability seen in the September and December 2019 quarters. However, JLR’s woes are not recent. The business has seen deterioration since 2015-16. After recording its highest profit after tax (PAT) of £2,038 million in 2014-15 (highest since the acquisition of the business by Tata Motors in 2008-09), PAT fell steadily over the next three years to £1,114 million in 2017-18. In the following two years — 2018-19 and 2019-20 — JLR recorded losses of £3,321 million and £469 million respectively.

Over these years, weak topline growth as well as margin pressures, along with increasing debt impacted profitability for JLR. After peaking at 18.9 per cent in 2014-15, EBITDA margin steadily came down to 8.7 per cent in 2019-20. It was at 3.5 per cent in the latest quarter.

Total debt for JLR stood at £5,900 million as at the end of 2019-20, inching up from about £3,600 million levels seen in 2016-17 and 2017-18. Another £647 million debt has been added during the June 2020 quarter. Despite a cut-back on investments, inventory rationalisation and cost control efforts through ‘Project Charge’, the JLR business has been free cash flow negative for the last three years. In the latest quarter, free cash flow stood at a negative £1,512 million. Improvement in these metrics is key for investors.

Targeted efforts

Towards this, JLR has further cut down on capital expenditure plans. Targeted capex for FY21 stands at £2,500 million, the lowest in the last five years. The target under ‘Project Charge+’ - the second phase of the Charge programme rolled out from the last quarter of 2019-20 — has been increased to £2,500 million for FY21, against £1,500 million set earlier. In the June 2020 quarter, JLR has already achieved savings of £1,200 million under Charge+. Further reduction in inventory, material, warranty and overhead costs are expected.

If these efforts bear fruit, JLR expects to be free cash flow positive beginning FY22. The group also has plans to ‘significantly’ deleverage by FY23, though contours of the plan are still not available. Net debt stood at £2,200 million as of end-2019-20. JLR was net debt negative until 2017-18, implying cash and cash equivalents on books were higher than debt. An improvement in cash flows could help reduce net debt for JLR.

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