Fitch revises outlook on JLR from 'stable' to 'positive'

International rating agency Fitch has revised the outlook on Tata Motors' British arm Jaguar Land Rover (JLR) to positive from stable apart from affirming the long-term foreign currency issuer default ratings and senior unsecured debt rating at 'BB-'.
"The change in outlook to positive from stable reflects JLR's continued strong operational performance and our expectation that the company will maintain its robust financial profile, despite a period of heavy investment in its transition to become a higher volume premium manufacturer," Fitch said in a statement from Singapore today.
The positive outlook indicates that an upgrade could occur over the next 24 months if JLR continues to maintain its profitability, generate positive free cash-flows and increase its breadth and volume of products, it said, adding that the successful execution of the Jaguar XE compact sedan model is seen as a key part of this.

The report said it expects JLR's sales and profitability to continue to be robust this fiscal and FY16 on the back of a strong product pipeline and rising global demand for premium vehicles.
"We expect JLR to maintain margins above 8 per cent in FY16 despite increased costs associated with elevated capex and heightened competition," the report said.
Retail volumes in FY14 rose 16 per cent driven by the Range Rover Evoque, New Range Rover Sport and the Jaguar XJ, XF and F-Type. A richer product and geographic mix contributed to the rise in the Ebitda margins to 11.7 per cent from 10.8 per cent in FY13.

The company could continue these improvements in Q1 of FY15, with retail sales rising 22 per cent and Ebitda margins to 15.9 per cent, though the positive forex effect also helped from 10.9 per cent in Q1 of FY14.

The report, however, noted that limited scale and product diversity continue to constrain JLR's business profile and raise the risk of volatility of earnings and cash flow.
"However, we recognise that JLR's current heavy investments, if successfully executed, will increase its product breadth and volume over the medium term."
We expect JLR's investments in capacity expansion, engines, vehicle architecture and new technologies to meet emission requirements will contribute to be negative FCF in FY15-16, despite strong cash flows from operations.

The JLR management has indicated capex of 3.5-3.7 billion pounds in the current fiscal, it noted and said it sees the company spending 3 billion in capex in FY16 as well.