Tata in trouble as Jaguar margins shrink

REUTERS

Showroom attendants polish a Jaguar vehicle at a Jaguar Land Rover showroom in Mumbai February 13, 2013. Hit by falling margins and rising capital expenditure, roaring Jaguar Land Rover (JLR) may be heading for a speed trap. Rising investment is eating into the luxury carmaker's cash pile and raising the prospect of fresh borrowing, while falling profitability is set to tip parent Tata Motors into a first drop in profits in five quarters. Picture taken February 13, 2013. REUTERS/Vivek Prakash (INDIA - Tags: BUSINESS TRANSPORT)

Henry Foy Mumbai

Hit by falling margins and rising capital expenditure, roaring Jaguar Land Rover may be heading for a speed trap.

Rising investment is eating into the luxury car maker’s cash pile and raising the prospect of fresh borrowing, as falling profitability saw parent Tata Motors post its first drop in profit in five quarters.

Increasing reliance on lower-margin models such as the Land Rover Evoque and Freelander and adverse currency movements have reduced Jaguar Land Rover’s profit margins, and free cash flow at the unit turned negative just months after it paid its weaker parent a maiden dividend.

Negative cash flow would continue in the next financial year, Jaguar Land Rover said, as the unit that has propped up its Indian owner for the past 18 months starts a £2.75 billion (R38.2bn) a year splurge on its plants and product pipeline.

Tata’s net profit for its third quarter to December last year came in far below market estimates at 16.28 billion rupees (R2.7bn), down 52 percent year on year and the first fall since the quarter to September 2011.

Analysts had expected average profit of 28.9 billion rupees, according to Thomson Reuters Starmine.

Much of the fall was down to a slide in Jaguar Land Rover’s blockbuster operating margins to 14 percent in the quarter, down from 17 percent in the year ago period, due in part to a shift toward less profitable models.

“Over the next couple of years, they are unlikely to generate much cash. That’s a worry,” said Joseph George, an analyst at IIFL Institutional Equities in Mumbai, one of seven with a negative rating on the stock. “That’s going to be a problem for Tata.”

Jaguar Land Rover had net cash of £437 million at the end of September, but as it ploughs money into a new engine plant in Britain and a factory in China, it will no longer be the cash-generating driver for its struggling owner, Asia’s seventh-biggest vehicle maker by market value.

Jaguar Land Rover’s cash was the primary reason behind an improvement in Tata Motors’ net adjusted debt to operating earnings before interest, tax, depreciation, and amortisation ratio to 0.98 in the year to March from 1.21 in the previous year, ratings agency Fitch said in a recent note.

The storied British car maker, which makes sleek Jaguar saloons and rugged Land Rover 4x4s, raised $500m in fresh debt last month and said it would raise funds from capital markets and banks to fuel its capex as required.

Over the past month, 18 analysts have cut their Tata Motors annual earnings estimates by an average of 7.9 percent, six have cut their stock price targets and three have downgraded the shares to a sell, according to Starmine.

Its shares, valued at $16.5bn and India’s best performing blue chip last year with a gain of over 70 percent, have fallen 10 percent since hitting a record high on January 10, while the NSE index has lost 1 percent.

Shares in the vehicle maker, which is also listed in New York, fell 2.5 percent on the Mumbai market yesterday ahead of the results. The broader market ended down 0.6 percent.

Jaguar Land Rover contributed around 90 percent of Tata Motors’ net profit in the last financial year, so the UK unit’s margins are more closely watched by investors than those at its domestic business. Tata used Jaguar Land Rover’s cash flows to service the debt raised to buy the UK car maker for $2.3bn in 2008. – Reuters