JLR Remains Cautious Amid Cost Cuts, Focus On Electric Future
JLR is optimistic on its strategy to make electric vehicles and cut costs.
Jaguar Land Rover Automotive Plc remains cautious as it faces challenges in its key markets of China, U.S. and the European Union.
The luxury car arm of Tata Motors Ltd.—which posted a loss of $3.8 billion in the quarter ended December 2018 led by slowing sales in China, technology disruptions and rising cost of debt—in its annual report said it needs to make significant investments to overcome multiple market headwinds, including geopolitical, technological and regulatory, facing the auto industry.
Woes in China, U.S.
JLR said the economy in China—its growth engine—was slowing, exacerbated by U.S. trade tensions, weaker consumer demand and a declining stock market. It said it has implemented a strategy to reduce discounting pressures, improve dealer profitability and protect the premium nature of its brands.
JLR has outlined a plan for operations in the European Union, which contributes to nearly 20 percent of its sales. To mitigate risks, such as a no-deal Brexit, it said it has resorted to factory downtime and ensuring availability of buffer production stock.
The company was wary about the proposed 25 percent tariff on imported vehicles in U.S. Given that all JLR vehicles sold in the country are imported, such a tariff would severely impact business performance and competitiveness, it said.
How Much Has JLR Cost Tata Motors?
Focus On An Electric Future
JLR is betting on new products and next-generation technologies to tap future market potential. The company said it has introduced a portfolio of eletric vehicles and is committed to electrify every new vehicle model from 2020. It also said it aims to improve quality, reduce cost and increase operational efficiency with the introduction of modular architecture process across its product portfolio in 2020.
Cutting Costs
JLR chairman N Chandrasekaran was quoted as saying in the report that the last 12 months were challenging for the automaker as it faced headwinds from slowing sales in China and Europe, high fixed-cost structures and increased investment leading to cash outflows.
Chandrasekaran said two initiatives—Project Charge, to reduce costs; and Project Accelerate, to address structural challenges on product launches—have begun yielding results.
Still, the U.S.-China trade war and Brexit remain the key worries. Ralf Speth, chief executive officer at JLR, was quoted as saying in the annual report an increasingly protectionist global trade agenda and ongoing uncertainty over Brexit impacted their ambitions for sustainable competitive growth.
Brokerage View
CLSA expressed concern over JLR’s cautious commentary, rising warranty ratios and impairment concerns. It maintained a ‘Sell’ rating on parent Tata Motors with a target price of Rs 150 apiece—below the Tuesday’s close of Rs 155. 8. Still, the average of estimates tracked by Bloomberg suggest an upside of about 45 percent.
Warranty expense and provision ratios are at a nine-year high, Nitij Mangal, automobile analyst at CLSA, said in a report. Rising warranty ratios are not only a drag on financials but raise concerns given the brands haven’t fared well on quality surveys such as JD Power, he said.
Due to the second straight year of negative free cash flows, JLR has a net debt of £700 million, from £900 million of net cash last year.
Tata Motors has been the second-worst performing stock on the NSE Nifty over the past 12 months, falling 43 percent. Only Yes Bank Ltd. has fared worse, declining 74 percent during the period.
Nearly 10 percent of the analysts tracking Tata Motors have a ‘Sell’ rating; 45 percent recommend ‘Buy’ and ‘Hold’ each.