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Tata Motors Earnings Disappoint As Net Income For The Quarter Shrinks By 25%

|About: Tata Motors Limited (TTM)

Summary

Tata Motors announced Q3FY15 earnings with a profit before tax decline of 6.4% while profit after tax for the quarter shrunk by a significant 25.5%.

China remains a crucial market, where they sold more than a quarter of their worldwide production.

There is the slowdown in the Chinese economy’s growth, which was apparent in JLR’s sales which grew by 4%.

JLR is optimistic about its future in China, even launching a plant which should help the company start selling locally produced Range Rover Evoque SUV by the end of March.

The automaker also plans to expand to other regions by following up with a new plant in Brazil, which should start production by 2016.

Tata Motors (NYSE:TTM) reported its 3rd quarter earnings for the fiscal year of 2015 and even though sales figures and volumes improved this quarter, the company stock took a hit as the company's profits failed to impress investors.

The consolidated report published by the automaker recorded a profit before tax decline of 6.4% while profit after tax for the quarter shrunk by a significant 25.5% from the same period last year. Within Tata Motors' company value undoubtedly most of its valuation comes from its Jaguar Land Rover (JLR) brand, which according to Trefis estimates makes up about 95% of the company's valuation. Ever since Tata bought the iconic British brand back in 2008, the division has helped the Indian Car manufacturer maintain profit levels. For the JLR brand China remains a crucial market, where they sold more than a quarter of their worldwide production; a fact visible on their consolidated income statement where JLR revenues grew by 10.3% in the quarter.

However there are two factors about their operations in China that proved to be worrying for the company. Firstly, there is the slowdown in the Chinese economy's growth, which was apparent in JLR's sales which grew by 4% this past quarter as compared to the 40% growth rate they recorded in the same quarter last year. What is even more troubling for the company is that the luxury car market in the world's largest country has recently stepped its game up as Mercedes-Benz tries to take pole position from rivals BMW and Audi. Even though the growth rate of the Chinese economy reduced to 7.3%, the country still holds massive potential when we consider the automobile sector. Despite being more than 3 times the size of the US, China only counted 78 million registered vehicles as compared to the 250 million registered vehicles in the US, according to data by Statista. Even if the economic growth rate is slowing down, it still leaves massive potential yet to be exploited. However, the German trio is battling it out with each other and in the process making it difficult for other brands like JLR to compete efficiently.

Nonetheless, JLR is optimistic about its future in China, even launching a plant in China which should help the company start selling locally produced Range Rover Evoque SUV by the end of March this year. The automaker also plans to expand to other regions by following up with a new plant in Brazil, which should start production by 2016. It is no wonder that according to Trefis estimates total JLS sales could potentially cross 1 million units by 2020 mostly driven by continued progress in the relatively untapped Chinese markets.

What continues to be a major drag for the company is its standalone business which continues to record losses. This past quarter Tata reported a net loss of 21.23 billion rupees as compared to the 12.51 billion in the corresponding quarter last year. The spike in losses was attributed to higher expenses and a fall in sales. In a country where Tata cars are looked down upon as being taxi cars, the company tried to revamp its image by launching the compact sedan known as Zest in August last year and the Bolt hatchback in January. The initiative is part of a larger plan where the company plans to launch two new models in the country each year to help sales recover in a market where the automobile industry has seen slow consumer vehicle sales all across the board.

The company stock currently trades at $46.67 per share after taking a tumble after the third quarter earnings release. Some of the other factors that played out in the company's favor were the currency situation which saw the Sterling has depreciated against the US dollar while the Sterling has appreciated against the Euro. But even that was not enough to offset the company's drop in profit margins. Maybe in the long run the company might be able to stabilize and return to profit making ways. A massive turnaround for the company could happen if the consumer vehicle market in India improves and helps the company return to churning profits. Until then the company is solely dependent on JLR to keep its operations afloat.

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