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Tata Motors domestic business struggles while JLR rides high

The global business of Jaguar Land Rovercontinued to play a big role in Tata Motors' financial performance in the March quarter, overshadowing the poorly performing domestic business. The JLR subsidiary accounted for almost 90% of Tata Motors' consolidated operating earnings and more than 95% of its consolidated profit after tax in FY13. 

On Tuesday, 
Tata MotorsBSE 3.00 % reported a 10% growth in operational earnings or EBITDA (earnings before interest depreciation and tax) in FY13 over the previous fiscal, as JLR continues to firm up its presence in the Chinese automobile market. While the share of China in JLR's total sales volume shot up from 17.3% last year to 21.4% in FY13, the success of Range Rover Evoque has helped the company improve its annual EBITDA margins from 15% to 15.2% over the past year. 

This, in turn, aided Tata Motors report consolidated EBITDA margins of 14.1% against 14.3% a year ago, which, despite a marginal contraction of 20 basis points, are impressive considering that on a standalone basis, Tata Motors has nothing much to offer its investors. 

The story on the domestic front is gloomy, to say the least. Tata's standalone EBITDA margins nearly halved from 8.1% a year ago to 4.8% making FY13 one of the worst years for the company. Tata Motors' standalone business, that incurred losses on operational levels and could just manage net profit of about Rs 300 crore for the year driven by stupendous rise in the other income on account of dividend receipts of Rs 1584 crore from its subsidiaries. 

For the quarter ended March, the company made a loss of Rs 312 crore, its second consecutive quarterly loss. FY'13 
revenues dropped by 18% and operational earnings (EBITDA) dropped by over 51% over previous year, 

While the slowdown in the domestic 
economy is one of the key reasons for Tata Motors's frail standalone financial performance the fact that company is struggling heavily to cope with competition, especially in the passenger vehicle segment has raised major concerns over the prospects of this business segment for the next couple of years. 

An adverse product mix and heavy discounting in order to push sales both on the passenger vehicle and commercial vehicle segment also resulted in deterioration in the company's average net realisations by almost 6.5% to Rs 5.48 lakh per unit over past year. 

Changes to products and new launches will take time and there is unlikely to be any noticeable change in financial performance especially if weak economic conditions persist. The commercial vehicle segment, which is also the bread and butter business of the standalone operations is also likely to see some more pain in the coming months as the recovery in the industrial economy is far from being visible today. 

Given this bleak outlook, the muted question with investors and analysts is whether one should consider investment in Tata Motors stock. At Rs 303 per share, Tata Motors's share trades at 8 times its trailing twelve month consolidated Price to Earning (P/E) multiple, which is at a reasonable discount to the industry P/E of close to 13. 

This is not a bad price to pay for JLR that clearly outshines the parent Tata Motors operations and is the carrot behind domestic institutions, especially fund managers' investment interest in the stock. One can consider accumulating the stock at dips for JLR's strong business operations.