The almost spectacular set of numbers turned in by Jaguar and Land Rover (JLR) for the December 2009 quarter proves that a lot of common sense combined with a little luck can go a long way in turning around a company?s fortunes. What seemed improbable even three or four months back is now a reality thanks to some cost-cutting initiatives and some new launches. After reporting a loss in the September 2009 quarter, JLR?s profit after tax (PAT) for the three months to December 2009, came in at 55 million pounds which was nearly three times analysts? estimates.
Demand hasn?t recovered in the UK but Christmas sales were brisk in some other European markets as also the US. That apart, both the Jaguar and the Land Rover sold exceedingly well in China; the increase over the September quarter was 200% and 60% respectively, albeit on a much smaller base. With all this, volumes rose 28% over the September 2009 quarter.
And with JLR able to cut back on incentives, the average selling price was higher by about 8% translating into an increase in the net sales of 23.4%. The top line growth was enough to bring down the ratio of raw material to sales by 130 basis points sequentially and push up the ebitda (earnings before interest, tax and depreciation) margin by nearly 700 basis points to 9.8%. That has sent analysts back to their spreadsheets and the good news is that Tata Motors? consolidated net debt-equity ratio will come off to a very reasonable 1.32 times by 2011-12.
Of course, JLR needs to continue the good work to drive up sales. But the management deserves credit for doing well in 2009 which was undoubtedly a bad year after the global financial crisis of 2008. True, much of Europe is yet to bounce back but despite this JLR?s revenues in the December 2009 quarter were nearly two billion pounds. And it has managed a profit, which means there was some operating leverage.
So when volumes do pick up, perhaps not immediately given that the outlook globally is somewhat uncertain, but one or two years down the line, the operating leverage should be far higher. And, therefore, the profits. It may too soon to bring out the bubbly, but the turnaround has been quite remarkable. With the home market looking up, the market believes Tata Motors is virtually out of the woods— the stock has moved up 21% in the last four trading sessions and closed at close to Rs 812 on Thursday.
One can?t help recalling that in November 2008, the stock price had crashed to a near six-year low of Rs 126, with investors worried about the company?s future. Since then the stock has been more than a six bagger, partly thanks to the speedy recovery in the home market and the turnaround at JLR.
Tata Motors should stand to gain from the recovery in the home economy because the railways isn?t as efficient as it should be. So it wouldn?t be surprising if sells many more trucks next year to ferry cement steel and agricultural goods across the country and volumes grow in high double digits.It may be a while before Tata motors makes a decent return on the investments that it has made in JLR or in the Nano but cash flows are clearly coming through.