Country's largest commercial vehicle producer Tata Motors disappointed the street with its third quarter numbers on consolidated as well as standalone basis. Basudeb Banerjee of Quant Broking believes Tata Motors needs to rework thier strategy as far as margins go. "An earnings per share (EPS) of Rs 38 is possible in FY14, which will factor in all the negative commentaries given by management in terms of JLR," Banerjee told CNBC-TV18.
Banerjee is confident that Jaguar Land Rover (JLR) volumes can easily shoot 4 lakh figure in FY14 and 3.60 lakh this year. Tata Motors consolidated net profit fell more than 52 percent year-on-year to Rs 1,627 crore in the quarter.
Below is the verbatim transcript of Basudeb Banerjee's interview on CNBC-TV18
Q: Tata Motors Q3 numbers are below expectation. What have you made in terms of a first take for Tata Motors especially on the standalone loss?
A: Yes, standalone loss magnitude was much more than expected, but broadly it is not a surprising post the volume figures they have delivered throughout the quarter across the cars and the medium and heavy commercial vehicles (MHCV) segments. If you take cues from other competitors like Ashok Leyland where MHCV discounts are at an all-time high, margin capitulation in standalone was very much expected which led to this massive standalone loss.
Looking at the consolidated figure because of this major loss in the standalone number, the adjusted effective tax rate is around 40 percent against normalised tax rate of 28-30 percent. The profit after tax (PAT) would have been somewhere higher by Rs 300 crore. Because of this surprising tax rate the overall reported PAT is much below Street estimates at around Rs 1,630 crore.
The brighter part is JLR EBITDA is 533 million pound which is close to Street estimates and people are more concerned about JLR business fundamentals rather than standalone. So, standalone these tailwinds will continue even in next quarter, but the best part is the health of JLR business is still sound despite all those negative comments made by management a fortnight back.
Q: With respect to the higher tax that we have seen in the quarter on the standalone business do you think it is a one off that the tax is higher at 40 percent and should normalize? Was there any indication that the tax would shoot up? What would you attribute it to?
A: No, we were anyhow factoring in tax on consolidated basis in the longer run to be somewhere around 30 percent. Gradually, it has inched up from 20 percent levels in past three four quarters because a significant part of the earnings of JLR is coming from non UK market which are fully taxable. Broadly 40 percent, I don't think is a sustainable number. Management will clarify why this huge tax rate was there this quarter. So normalised taxes 30 percent, we expect to be the norm going ahead.
Q: On a consolidated basis what sort of earnings per share (EPS) estimates are you working with on FY14 considering that people are more positive about Jaguar Land Rover and not so positive about the standalone or the domestic business?
A: We have to rework on the margin front after this kind of carnage this quarter. On a broader basis, somewhere around Rs 38 kind of EPS is highly possible in FY14 which will factor in all the negative commentaries given by management in terms of JLR, in terms of higher capex and negative free cash flow (FCF) and relatively lower margins. In volume terms we are confident that JLR can easily shoot 4 lakh figure in FY14 and 3.60 lakh this year.
Q: If you assume a normalised tax of close to 30 percent odd for the standalone business and not 40 percent that they have seen, then would the standalone numbers be in line with your expectations or would they still be amiss?
A: No, 40 percent came on a consolidated basis, not on standalone numbers. Standalone anyhow was a loss so there is no point in calculating tax rate there.
Q: How are you placed on the JLR business going forward into FY14? We saw the January sales, they were pretty positive with a 30 percent growth on year-on-year basis. Give us your standalone estimates only for JLR and what you would be working with for FY14 in terms of a run rate?
A: JLR for FY14 we are taking 400,000 units which ask for a monthly run rate of somewhere around 34,000. 38,000 this month and maybe in March again you cannot take it as a normal run rate going ahead, because JLR volumes are always skewed in Q4, specifically post the Christmas month. Then it gets followed by a muted Q1 and some summer months of September. So, the volume skewness is very much there in the months of January and March.
Q: Going forward, what would you be factoring in terms of consolidated margins, standalone margins as well as JLR margins?
A: JLR margins, sustainable numbers should be somewhere around 14-14.5 percent from Forex headwinds in the form of stronger pound against dollar vice-versa may fluctuate in a few quarters. On a longer term basis with the kind of product portfolio 14-14.5 percent margin is quite sustainable. For standalone in this kind of environment where high MHCV discounts are there and in the car business you can see the market share loss they are undergoing through striving for a 5 percent operative margin will also be a tough ask. So, combining these two consolidated EBITDA margins will somewhere be around 11 percent.