Fitch affirms JLR ratings at 'BB-' with positive outlook

Fitch has reaffirmed the long-term foreign currency issuer default rating and senior unsecured ratings of Tata Motors-owned Jaguar Land Rover at 'BB-' with positive outlook.
'BB' is a speculative grade rating, indicating elevated vulnerability to default risk but business or financial flexibility exists which supports the servicing of financial commitments.
"The ratings reflect our expectation that JLR Automotive Plc will continue to maintain sound profitability and a strong financial profile, despite a period of heavy investment to become a higher-volume premium manufacturer," Fitch Ratings said in a statement issued from Singapore.
"We expect the launch of new models and replacement of old models in 2016 to support its sales volumes and profitability, even though the British company is facing challenges on several fronts, including weakening sales volumes in its largest market China," it added.

The report retained its positive outlook on the Tata Motors' luxury unit.
Explaining the key rating drivers, Fitch cited sound profitability as the most important one, saying, "We expect JLR to maintain EBIT margins of 8 per cent in the current financial year and also in FY17, despite heightened competition, increased costs associated with elevated capex and falling demand in China and emerging markets."

It further expects profitability to be supported by its core Land Rover products and the roll-out of new/refreshed products in 2016, including the new Evoque convertible, the all-new Jaguar XF and Jaguar SUV, F-Pace.
The report notes that last fiscal, the EBIT margin of JLR widened to 12.4 per cent from 11.7 per cent in FY14 driven by a favourable product/volume mix and continued robust demand for premium vehicles globally.

The report, however, noted that EBIT margins fell to 10.1 per cent in Q1 of this fiscal against 15.9 per cent a year ago due to weaker product mix and lower sales in China.
The 2016-17 profitability could be eroded by slowing sales in the West, larger-than-expected volume decline in China and emerging markets, or weak sales for new/refreshed products to be rolled out in 2016, it warned.
A major downside is the limited scale and range of its products which are smaller than its peers, which raises the risk of volatility in earnings and cash flow and constrains its business profile.

However, JLR's current heavy investments, if successfully executed, would increase its product breadth and volume over the medium term, it added.
On the high capex, which is pegged at 3.6 billion pounds this fiscal, the report said it expects spending for capacity expansion and engine manufacturing would contribute to negative free cash flow in 2016-17.
Fitch sees capex slightly coming down to 3 billion pounds in 2016-17. In FY15, the company spent 2.9 billion pounds on capex.