Tata Motors’ healthy sales growth comes at a price

Tata Motors Ltd’s standalone business has been forging ahead with strong double-digit sales growth in commercial vehicles (CVs) and passenger vehicles (PVs). However, it looks like the automobile juggernaut is beginning to pay a price for sustaining this growth.

The company’s rising trade receivables indicate it is deploying more credit to push sales. During fiscal year 2018 (FY18), the standalone entity’s trade receivables, which is the amount customers (dealers) owe the firm, rose sharply by 64%, twice the rise in sales. Even as a percentage of sales, it rose to 5.9% from 4.8% in the year-ago period. So, in other words, high sales, are perhaps at the cost of more liberal credit terms to dealers.

This raises some concerns. Typically, buoyant sales mirror good times when company discounts and marketing freebies, including the credit period to dealers, are cut back. This has been the trend across most auto companies since FY18. Rising auto sales after the introduction of new emission norms and the goods and services tax (GST), led to healthier financials for auto firms.

Take the case of arch-rival Ashok Leyland Ltd. Its trade receivables as a percentage of sales dropped to 3.7% in FY18 from 5.3% in the year-ago period—a sharp contrast to Tata Motors.

According to P.B. Balaji, chief financial officer at Tata Motors, higher receivables were due to a higher proportion of business with state transport undertakings and the defence sector, where the collection period is longer than other segments. Also, the firm provided support to dealers who faced funding challenges to meet tremendous growth.

Meanwhile, analysts say that Tata Motors may be pushing sales through longer credit periods. Such strategies may help to arrest the slide in market share and regain lost ground. Note that the company’s CV share is down to 45% from 60% five years ago, when it ruled the roost.

This is not all. Perhaps, the recently spelt out Turnaround 2.0 strategy to fire PV sales and become self-reliant calls for a liberal credit policy with dealers to combat competition. Since the firm does not divulge segment-wise details of income and expenditure, it’s hard to tell if the drain on account of higher receivables is from the CVs or PVs segment, or from both.

Meanwhile, the game is playing out slightly differently at its UK subsidiary, Jaguar Land Rover Ltd (JLR). Dealer support may be needed to develop a customer base for new models with each geographic region having a different credit mechanism. The company adds that richer product mix and higher wholesale numbers led to higher receivables.

Sometimes, the credit period may be extended for dealers when old models are being phased out.

In any case, Tata Motors’ management concedes that JLR’s performance was disappointing in FY18. Yet, it has conviction that the mind-boggling investments into product development that will continue for the next two years will translate into rich dividends later. After all, the company has set a trailblazing record of pulling JLR out from its huge burden during the acquisition.

This is further complicated by macroeconomic issues such as Brexit and the slowdown in the US market. Meanwhile, the shift towards electric vehicles is a temporary blow to JLR, as most of its portfolio is diesel driven.

Be that as it may, the near-term pressures are weighing on the Tata Motors stock. The company’s free cash flows will be in the negative territory for the next two years. Little wonder then that the stock has been underperforming competition and benchmark indices, at a time when demand for Tata Motors’ products is surging.