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MOSL: ANNUAL REPORT THREADBARE (ART) | TATA MOTORS FY18: Hedge exposure reduces; FCF declines further

ANNUAL REPORT THREADBARE (ART) | TATA MOTORS FY18: Hedge exposure reduces; FCF declines further

 

Tata Motors’ FY18 annual report analysis highlights a decline in  FCF post interest (adjusted for financing business) to negative INR89b (FY17: negative INR62b) primarily on account of rising investments in working capital and higher capex. While reported EBITDA remained muted at INR333b (FY17: INR335b), the company continued its policy of capitalizing (~83% @ INR204b v/s ~78% @ INR155b in FY17) product development expenses.  Earnings were, however, impacted by derivative losses of GBP1.6b (FY17: GBP1.2b) on hedges; unrealized hedge losses of GBP345m (FY17: losses of GBP2.3b) remained outstanding in the hedge reserve. The hedging policy seems to be inconsistent with (a) derivatives to hedge USD sales declining to GBP5.4b (FY17: GBP8.7b), and (b) derivatives to hedge EUR costs increasing to GBP6.5b (FY17: GBP5.7b). Tax rate increased to 39% in FY18 due to reversal of deferred tax credit; this is likely to normalize in the coming year. Adjusted debt (ex finance arm) increased to INR842b (FY17: INR770b) with a borrowing cost of 6.7%, which coexists with cash and investments of INR497b (mainly at JLR) generating a yield of 1.8%, resulting in negative carry.

•  Operational performance muted, Chery JV the silver lining: Revenue grew 9% to INR2,946b, with standalone revenue growing at 33%, dragged by 6% growth in JLR. EBITDA margin contracted to 11.3% (FY17: 12.4%). Forex gains at INR12b and exceptional gain (on pension of INR36b, partially offset by INR16b provision for impairment of CWIP and ITUD) supported PBT (at INR112b v/s INR93b in FY17). Chery JV’s revenue grew 25%, with a 360bp margin expansion to 27%. JLR’s pension fund contribution was INR25b while cost recognized in the P&L was INR20b.