Tata Motors: Road ahead smoother after speed bumps in Q2?

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Subscribe to enjoy similar stories. Operating leverage is a double-edged sword, and Tata Motors Ltd illustrates this well. Factors that had dampened sales of its UK-based luxury car subsidiary, Jaguar Land Rover Automotive Plc (JLR), in the September quarter (Q2FY25) have now been resolved, setting the stage for a sales recovery in the second half of the fiscal year.

This anticipated rebound in operating leverage may explain why Tata Motors' shares showed resilience on Monday despite a weak Q2 earnings report. JLR’s wholesale volumes declined by 9,500 units year-on-year to 87,300 vehicles in Q2. This drop stemmed from disruptions such as severe flooding affecting a key high-grade aluminium supplier and an unforeseen event of temporary hold on 6,029 vehicles for quality control checks.

JLR’s impact on Tata Motors is substantial, given its sizable 80% contribution to consolidated profit in FY24 Ebit. Against this backdrop, Tata Motors’ consolidated performance was expected to show strain, yet the results were still disappointing. Consolidated Ebitda (earnings before interest, tax, depreciation, and amortization) declined 15% year-on-year to ₹11,671 crore in Q2.

JLR's Ebit margin dropped by 220 basis points (bps) to 5.1%, falling sharply below most analysts' expectations due to the underestimated impact of negative operating leverage. Tata Motors’ presentation indicates that the lower volumes alone reduced the Ebit margin by 214 bps, though the company managed to offset some of the higher variable marketing costs through savings in variable and other expenses. But is JLR’s Q2 margin drop a worry? Not really.