The Tata Motors stock fell by 5 per cent on Friday after the company reported a 25 per cent year-on-year decline in consolidated net profits for the third quarter ended December 2014. While Jaguar Land Rover profits fell by about 4 per cent over the corresponding quarter of last year, the standalone business made a loss of Rs 2,123 crore compared to a profit of Rs 1,251 crore last year.

But the latest profit numbers must be seen in the light of certain exceptional items, provisions, write-offs and forex losses.

Standalone business

As far as the standalone performance is concerned, it is paradoxical that in the thick of the slowdown in the domestic auto industry last year, the company managed to report a profit; while now, when the industry is on a recovery mode, the company has incurred losses.

This is because of two things - standalone profits for the December 2013 quarter included profit on sale of investments in certain foreign subsidiary companies totaling Rs 1,950 crore and a reversal of tax provisions amounting to Rs 600 crore. Second, standalone profits for the latest December 2014 quarter includes a one-time provision of about Rs 310 crore (reflected in other expenses) for cost of buildings, etc. This provision has been made as a matter of prudence for its stalled project site in Singur. Litigation is on between the company and the government of West Bengal over the rights to use the land.

But for these one-time adjustments, the company appears well-poised to ride the recovery in the domestic auto industry. Its truck and bus volumes grew 42 per cent during the quarter, and car sales grew 16 per cent.

JLR business

For JLR, the profits were lower due to unfavourable revaluation of foreign currency debt and unrealised hedges along with higher depreciation. Wholesale volumes for JLR grew at a subdued 5 per cent, with buyers waiting for the newer models of Discovery Sport and the Jaguar XE. But a richer product mix consisting of the Range Rover and Jaguar F-Type, together with strong sales in UK and China kept JLR’s operating margins strong at around 19 per cent, similar to the levels seen in the corresponding quarter of last year.

In the quarter to come though, margins may come off these highs. With China becoming JLR’s largest market, bringing in almost 28 per cent of the volumes, the company is setting up a joint venture in China to manufacture the Range Rover Evoque and few other products. Henceforth, JLR will account for only 50 per cent of the profits from this venture. Besides, marketing and launch expenses associated with the new Ingenium Engine plant, the Discovery Sport and Jaguar XE could also keep margins under check.

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