Tata Motors reported a loss of Rs 26,961 crore for the quarter ended December 2018 on account of asset impairment in its UK subsidiary, Jaguar Land Rover Automotive, the company said on Thursday. It attributed the non-cash loss, the largest in the company’s history in absolute terms, to uncertainties around Brexit, slowing sales in China, and technological disruptions facing JLR.
Revenues of the consolidated entity increased 5 per cent over the year-ago quarter. The improving performance of the domestic business helped it report a net profit of Rs 618 crore. During the quarter, the cumulative sales of commercial and passenger vehicles were down 0.5 per cent to 171,354 units over the year-ago quarter.
P B Balaji, chief financial officer at Tata Motors, said the impairment at JLR would help the company reduce depreciation and ammortisation costs by almost 300 million pounds in a year and reduce the break-even point. “It’s a right step we have taken in terms of reducing our costs, improving our break-even, and improving our competitiveness,” said Balaji.
The impairment charges have been arrived at after taking into consideration the current assets on JLR’s books, future investment and “stress testing” it for low growth environment, coming particularly out of China, rising interest rates and technological disruptions, he added. The write-offs taken during the quarter also include the value of the goodwill on Tata Motors' consolidated books. At the end of March 2018, it stood at Rs 78,000 crore, including patents.
This is not the first time Tata Motors has taken impairment on its assets. In the fiscal year 2000-01, the company took an impairment of Rs 8,894.8 crore. Tata Motors' revenue then was Rs 80,778 crore.
Analysts were disappointed with the earnings and expressed concerns that the impairment might lead to some rating action. “Yet another disappointing results from JLR. Apart from the results, we are concerned by the significant erosion in equity led by the impairment and fear it would lead to rating actions by the agencies," said Nitesh Sharma, analyst at Phillip Capital.
Mahantesh Sabarad, head of retail research at SBI CAP, termed the impairment as “financial re-engineering”. He expects cash flows to remain under pressure as the UK subsidiary continues to face headwinds. “Impairments can only help you clean your balance sheet, but they don’t address the problem of cash flow. The company is not generating free cash flow as of now. Cash flow generation is contingent upon improvement in business, which is unlikely to improve in the near future,” said Sabarad.
During the quarter, JLR’s retail sales were down 6.4 per cent to 144,602 units. This, in turn, singed earnings at the firm. While revenues at the UK subsidiary rose 1 per cent to 6,233 million pounds over the year-ago quarter, margins contracted by 360 basis points to 7.3 per cent. It incurred a loss of 3,129 million pounds. A big chunk in drop in margins -- close to 250 basis points, was led by China, one of JLR’s most profitable markets, said Balaji. While JLR’s growth in most of its key markets, including the UK, Europe and the US, has been satisfactory, China “has been a problem,” he said.
It has taken a series of actions including the change in strategy from push to pull and focus on profitability instead of sales.The slowdown in the region has accounted for a 250 basis point drop in JLR margins; the remaining 250 basis is on account of production shutdowns.
Commenting on Brexit, he said even as the company was hopeful of a negotiated settlement, it was “preparing for the worst,” and it would undertake a shutdown of 2.5 to 3 weeks at its facilities in the UK.