JLR faces challenges in Europe

Tata Motors Ltd’s sales and profitability over the next two to three years will be good on stronger prospects in India but it would weaken at the UK subsidiary Jaguar Land Rover Automotive PLC (JLR), said S&P Global Ratings.

It cited prospects on (1) India’s improving GDP growth; (2) Tata Motors’ promising Commercial Vehicle (CV) and passenger vehicle product portfolio; (3) its better cost management through rationalization of platforms; (4) its increased distribution and customer-centric approaches, and (5) its supplier rationalization.

However, heightened price competition (practices of offering discounts) from Indian CV peers such as Ashok Leyland Ltd., Mahindra & Mahindra Ltd., and Bharat Benz Ltd., and the recently announced changes to the CV tonnage policy in India could constrain Tata Motors’ profitability.

S&P expects Tata Motors’ CV volume growth in India to remain strong over the next two to three years. S&P estimate that sales will rise 9.0%-13.0% annually during the period.

CV sales have bounced back sharply after headwinds such as a cyclical slump in demand, changes in India’s emission norms, demonetization, and imposition of the goods and services tax over the past few years. The CV volumes were up 16.7% year-over-year in fiscal 2018. The company’s market share also recovered to 45.1%, from 44.4% in fiscal 2017, it noted.

But citing JLR challenges, S&P lowered its long-term issuer credit rating on Tata Motors on 26 July 2018 to ‘BB’ from ‘BB+’. The outlook is stable, but JLR is seen weak in Europe.

The agency also lowered long-term issue rating on Tata Motors’ US dollar-denominated senior unsecured notes to ‘BB’ from ‘BB+’.

The downgrade reflects S&P’s view of the weakening operating conditions for the Tata’s fully owned subsidiary JLR over the next two to three years. A recovery in Tata Motors’ commercial and passenger vehicle businesses in India will only partially offset the weakness, said S&P.

“We expect JLR’s sales volumes to grow at 6.0%-8.0% annually over the next two to three years after a growth of just 1.7% in fiscal 2018 (year ended March 31, 2018). We had expected volumes to rise 14.0%-17.0% during the year,” said S&P of JLR, a U.K.-based maker of premium cars and accounts for three-fourths of Tata Motors’ reported revenue and EBITDA.

It attributed a part of the decline in volumes for JLR to Europe’s aversion to diesel cars after the Volkswagen AG “Dieselgate” emissions scandal. Diesel cars accounted for more than 30.0% of JLR’s volumes in fiscal 2018, although the share of diesel car sales in the company’s U.K. and the European Union (EU) sales was in excess of 80%.

Sales of diesel vehicles are gradually recovering in these markets, but S&P believe such vehicles are well past their peak. Tata Motors expects the share of hybrid and electric vehicles (EV) in its total sales volumes to rise to 20.0% by fiscal 2023, from about 5.0% now, tempering the impact of the decline in diesel car sales. JLR seems to have good EV offerings, although its EV volumes are at best nascent when compared to peers such as Daimler AG and BMW AG.

“We believe lingering risks of Brexit-related trade restrictions and of US import tariffs add further uncertainty to JLR’s operating performance.

JLR’s lower operating scale, higher concentration in the UK, and lack of manufacturing in its key US market, makes its financial performance less resilient than that of significantly larger peers such as Daimler, BMW, and Fiat Chrysler Automobiles.

The UK accounts for about 70.0% (although the share is declining) of JLR’s manufacturing capabilities, while North America (mainly the U.S.) accounts for 21.7% of its volumes sold. Offsetting some of these negatives would be China’s latest move to reduce tariffs on imported cars by about 10.0%.

“We expect JLR’s modest sales growth, stagnant price realization per car, rising commodity prices, and higher product development expenses to continue to weigh on the company’s profitability. Its EBITDA margin (mainly adjusted for capitalized product development expenses) was 5.7% in fiscal 2018, 130 basis points lower than our expectation and the margin in fiscal 2017. In comparison, peers have margins of 9.0%-12.0%.

“We expect JLR’s profitability to gradually recover to about 7.0% in fiscal 2019 and 9.0% by fiscal 2020. Modest volume growth from the company’s good product slate, savings from low-cost operations in Slovakia, and better cost controls should support the recovery over the next two to three years,” said the rating agency. fiinews.com