JLR loses operating leverage over China sales, Brexit

Mumbai: Tata Motors Ltd believes its money-spinner Jaguar Land Rover Plc (JLR) has lost operating leverage amid lower sales in China and Brexit, said a top executive at the Mumbai-based auto maker. The woes at the UK-based unit have raised concerns among investors and shareholders about how Tata Motors shares will fare going forward and the auto maker’s ability to continue paying dividends, said P.B. Balaji, Tata Motors’ chief financial officer.

JLR loses operating leverage over China sales, Brexit

Declining sales of diesel vehicles, Brexit concerns, tariffs and the need for high investments in the face of the technology disruption happening in the auto industry are among the big challenges that British luxury marques are facing, Balaji told Tata Review, an internal company magazine that comes out every quarter. Mint has a copy of the magazine.

“These are compounded by internal cost challenges. The teams are facing a new normal—of lower growths with higher capex needs—and are working actively to reduce costs and improve cash flows,” Balaji said.

JLR’s retail sales fell 12% from the year earlier in September, accelerating the fall over the last three months. The China market continues to be unsettled following “tariff changes and trade tensions” that led to a 46% drop in retail sales in the key market. Sales in the UK and Germany fell 20% and 31% respectively due to reduced diesel demand, while US sales, which were growing so far, also declined 5.5% last month. Then, there are execution challenges, said Balaji, adding in the last 12 months, JLR sales grew 2%, a drop from an average of 20-25% in previous years.

“The business has lost operating leverage over the last few years…,” he said. “The shareholders are concerned about the share price performance and the lack of dividend payments. It is imperative that we address these concerns fast,” Balaji said.

Trouble at JLR started about two years ago with currency woes, following Brexit. Profitability was impacted, compounded by falling sales due to makeovers and new model introduction. And now, macroeconomic issues such as the US-China trade war and the global drive towards lower carbon dioxide emissions from vehicles have led to a slump in sales of luxury diesel cars.

The state of affairs at JLR casts a shadow on a quick turnaround for the domestic business of Tata Motors as a whole. The firm posted a consolidated loss in the June quarter, which is likely to deepen in the September quarter. To be sure, the standalone commercial vehicle and passenger car business is on the upswing but Balaji prefers to remain conservative.

Also read | Tata Motors investors paying the price for China car sales slump

“The domestic business has had a good run, but we cannot get complacent; we should not forget we are in a cyclical industry. We need to regain our lost shares. We need to deliver cash break-evens in our PV business…,” he said.

Also read | There’s little hope for Tata Motors with JLR in dire straits

For Balaji, the primary concerns are China, where JLR models earlier sold like hot cakes. “These form the largest component of our stock price. China in particular is critical for us as it contributes disproportionately to our profitability.”

Shares of Tata Motors have fallen more than 60% so far this year. They closed 0.36% higher on BSE on Friday at ₹183.40 apiece.

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