Tata Motors sees profit fall as Jaguar Land Rover may be headed for trouble

Article by Christian Andrei, on February 18, 2013

Jaguar Land Rover may be headed for trouble as it faces declining margins and increasing capital expenditure. JLR’s cash pile is being eaten into due to increasing investment. This increases the likelihood of fresh borrowing, as declining profitability saw parent Tata Motors Ltd report its first decline in profits in five quarters. In the past financial year, JLR made up about 90% of Tata Motors' net profit.

This means that investors are more closely monitoring the UK unit's margins compared to those at Tata's domestic business. Tata has made use of JLR’s cash flows to resolve the debt that was incurred due to the purchase of JLR from Ford Motor Co. in 2008 for $2.3 billion. Because of the heavier dependence on lower-margin models like the Land Rover Evoque and Freelander as well as the unfavourable currency movements, JLR's profit margin decreased. Furthermore, free cash flow (FCF) at the unit became negative only months after it paid its weaker parent a maiden dividend.

JLR said that negative cash flow will continue in the next financial year as the carmaker begins 2.75 billion pound ($4.3 billion) a year investment program on its plants and product pipeline. The net profit of Tata for the third quarter had much lower market estimates at 16.28 billion rupees ($303 million), a 52% drop year-on-year and the first drop since the quarter to September 2011. Thomson Reuters Starmine said that analysts had expected average profit of 28.9 billion rupees.

A lot of this decline can be attributed to a drop in JLR's high operating margins to 14% in the quarter, a 17% drop compared to the previous year partly due to a shift towards less profitable models.

Thomson Reuters Starmine said that Joseph George, analyst at IIFL Institutional Equities in Mumbai, one of seven that had a negative rating on the stock, said that for the next two years, they’re not likely to generate plenty of cash, something that will cause a problem for Tata. At the end of September, JLR reported a net cash of 437 million pounds ($684 million). But due to investments for a new engine plant in Britain and a plant in China, it may no longer be the cash-generating driver for Tata Motors.

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