TaMo had accounting, PLI save the day in Q3, leaving investors unimpressed

The management has lowered JLR revenue guidance by 3% for FY25, while remaining optimistic of improving JLR wholesale sales further in the March quarter (Q4FY25) led by seasonality even as demand is particularly slow in China. JLR has not revised its free cash flow guidance lower despite having achieved £131 million so far in FY25 as against the target of £1.3 billion for the full year.

It has also retained its Ebit margin guidance of greater than or equal to 8.5% for FY25, implying it has to clock a margin of 10% in Q4, which is a tall ask given current market dynamics. Ebit is short for earnings before interest and taxes.

Accounting to the rescue 

In the Q3 earnings call, the management said it expects variable marketing expenses or discounts of JLR to rise further for a couple of quarters even as warranty costs stabilize. In such a scenario, it might have to again rely on lower depreciation and amortization (D&A) expenses to achieve its margin guidance.

Incidentally, a 28% year-on-year fall in D&A expenses was instrumental in driving the 20 basis point (bps) expansion in JLR Ebit margin to 8.9% in Q3. This is when JLR’s Ebitda margin shrank to 14% from 16% a year ago. Ebitda stands for earnings before interest, taxes, depreciation, and amortization.

Note that JLR capitalizes expenses on product development and engineering. Simply put, these are shown as a fictitious asset in the balance sheet and not as expenditures in the profit and loss account when it is incurred. This expenditure is amortized over a period and shown as a part of D&A expenses. JLR’s Q3 wholesale volume growth was tepid at 3% on-year and realization fell to £71,705 from £73,020.

The PLI boost

Coming to the India business segments, Tata commercial vehicles (CV) and Tata passenger vehicles (PV) received a cumulative PLI (adding FY24 and FY25 year-to-date) of ₹351 crore in Q3. Still, Ebit for the CV segment was flat on-year and declined 22% for the PV segment. These segments have been navigating a combination of poor volume growth and adverse sales mix. The CV business continues to struggle with market share sliding to 36.5% in Q3FY25 from 39.1% in Q1FY25. CV and PV volumes have declined on-year by 6% and 2%, respectively, to 294,100 units and 409,400 units.

Sure, the management has guided for a seasonally strong Q4 for JLR, but the Street is likely to wait for sustained demand revival where discounts are not required to be offered. 

Even for passenger electric vehicles in India, the competition for Tata is only going to intensify. The passenger car leader in India, Maruti Suzuki India Ltd, which had so far stayed away from electric vehicles, is set to change that with the launch of eVitara. Also, there have been recent launches of Hyundai Motor India Ltd’s Creta and Mahindra & Mahindra Ltd’s electric SUV. In CVs, there is not much the management can do as it is highly cyclical with more pronounced linkage to the macro-economic picture.

Tata Motors stock fell by 6% on Thursday, making its valuation attractive to that extent at a P/E multiple of about 10x based on FY26 Bloomberg consensus estimates. But investors await key catalysts such as the first electric Jaguar car that is likely to be produced in late 2025 and/or the implementation of the proposed split into two separate entities into CV and PV. Until then, a significant revival in the stock appears far-fetched, unless of course, demand trends throw a big positive surprise.