Tata Motors Ltd, posted its first drop in profits in five quarters as its Jaguar Land Rover (JLR) business faced higher spending and a drop in operating margin after 18 months of soaring profit.
Rising investment costs and falling profitability at the British carmaker, whose profits have propped up its weaker parent for the past year and half, combined with a drop into the red for the Indian company's domestic business.
JLR said operating margin was 14 percent in the December quarter, down from 17 percent a year ago, also due in part to a shift towards less profitable models.
JLR expects operating margin to remain stable in the coming quarters, Chief Finance Officer Ken Gregor told reporters, describing earlier margins as "extraordinary".
"The challenge for us as a business is to sustain at roughly the levels that they are at right now," he said.
Increasing reliance on lower-margin models like the Land Rover Evoque and Freelander and adverse currency movements saw JLR's profit margin fall, and free cash flow turned negative just months after it paid its weaker parent a maiden dividend.
JLR's cheaper, lower-margin Evoque and Freelander compact SUVs accounted for 52.5 percent of all Land Rover retail sales in the quarter, up from 43.7 percent a year earlier.
Currency fluctuations shaved off 50 basis points from JLR margins in the December quarter, the company said. The pound rose 0.7 percent against the dollar during the quarter, denting profits earned in the United States.
Tata's net profit for the third quarter of the financial year ending March 31 came in far below market estimates at 16.28 billion rupees ($303 million), down 52 percent on the year and the first fall since the three months to September 2011.
Analysts had expected average profit of 28.9 billion rupees, according to Thomson Reuters Starmine.
"Over the next couple of years, they are unlikely to generate much cash. That's a worry," said Joseph George, analyst at IIFL Institutional Equities in Mumbai.
JLR had net cash of 437 million pounds ($684 million) at end-September, but as it ploughs money into a new engine plant in Britain and a factory in China, it will no longer drive cash generation at its owner, Asia's seventh-biggest carmaker by market value.
Shares in Tata Motors, which is also listed in New York , fell 2.5 percent in Mumbai on Thursday before the results. The broader market ended down 0.6 percent.
JLR's cash was the primary reason behind an