Part of the software-to-hotels Tata Group, India's largest business by revenue, Tata Motors had reported its March quarter earnings after market hours Tuesday. The company said fiscal fourth quarter net profit had more than doubled, as it had been driven by a one-off tax gain. However, investors focused on the fall of operating margins at the luxury unit from 20.1 percent to 14.6 on a quarter-to-quarter basis.
The British luxury brand, which Tata bought for $2.3 billion in 2008, accounted for over 95 per cent of its profit in the quarter to March 31, as sales grew by 48 percent.
Global investment bank Morgan Stanley downgraded the stock today saying rewards look less compelling at current levels and earnings cycle is slowing after two years of upgrades.
Steep gains in Tata Motors shares this year, with the auto maker up 54 percent in 2012 as of Tuesday's close, magnified the falls, traders said. Shares in the company have slipped by about 10 per cent since it announced flat global sales for April, with investors worried the JLR sales boom may be subsiding.
Here are 5 reasons for the sharp fall in stocks today:
1) Tata Motor's luxury Jaguar Land Rover (JLR) models disappointed on the margins front in the March quarter. Margins in the fiscal fourth quarter grew at 14.6 per cent against expectations of 18.2 per cent growth. Consolidated EBITDA margins contracted 530 basis points to 14.8 per cent sequentially (quarter-on-quarter).
2) Margins were hit on account of higher staff costs post fresh hiring. Higher ad-spend and incentives also led to the fall. Goldman Sachs said the miss in the March quarter was mainly driven by weaker margins at JLR. Weak EBITDA margins were driven by higher other expenses.
3) One-off tax credit of Rs 1,826 crore in Q4 contributed to Tata's 139 per cent quarterly profit leap.
4) Core domestic business performance was lacklustre. Domestic car market grew just 2.2 percent in the last financial year. The local arm, India's biggest truck and bus maker, has suffered as high interest rates and slowing economic growth have dampened demand in Asia's third-largest economy. Auto makers had seen domestic sales surge before mid-March, as consumers frontloaded their purchases ahead of the unveiling of the federal budget for the 2012/13 that, as widely expected, raised excise duties for vehicles.
5) Brokerages downgraded the stock or cut their target price post earnings:
CLSA said the margin spike in the December quarter was a one-off and cut the earnings per share for FY13 by over 9 per cent. The brokerage cut JLR volumes by 5 per cent over FY13-14.
Bank of America Merrill Lynch cut its target price by 12 per cent to Rs. 286. It cut JLR margins by 250 basis points per year at ~15.5 per cent.
Morgan Stanley downgraded the stock to equal weight from overweight and reduced the target to Rs. 291 from Rs. 313.
However, some analysts said the negative reaction in the counter was overdone.
"The Ebitda margins for JLR were weak, which markets were not factoring in, but the overall outlook for Tata Motors remains good," Mahantesh Sabarad, senior vice president at Fortune Equity Brokers told NDTV Profit today.
(With inputs from Reuters)