Tata Motors set for profit fall as JLR cash boom shifts into reverse

By Henry Foy

MUMBAI (Reuters) - Hit by falling margins and rising capital expenditure, roaring Jaguar Land Rover (JLR) may be heading for a speed trap.

Rising investment is eating into the luxury carmaker's cash pile and raising the prospect of fresh borrowing, while falling profitability is set to tip parent Tata Motors into a first drop in profits in five quarters.

Increasing reliance on lower-margin models such as the Land Rover Evoque and Freelander and adverse currency movements will dent October-December results due later on Thursday, as JLR's free cash flow (FCF) turned negative just months after it paid its weaker parent a maiden dividend.

Negative cash flow will continue in the next financial year, JLR says, as the carmaker that has propped up its Indian owner for the past 18 months starts a 2.75 billion pound a year splurge on its plants and product pipeline.

"Over the next couple of years, they are unlikely to generate much cash. That's a worry," said Joseph George, analyst at IIFL Institutional Equities in Mumbai, one of seven with a negative rating on the stock, according to Thomson Reuters Starmine. "That's going to be a problem for Tata."

JLR had net cash of 437 million pounds at end-September, but as it ploughs money into a new engine plant in Britain and a factory in China, it will no longer be the cash-generating driver for its struggling owner, Asia's 7th-biggest carmaker by market value.

GRAPHIC: Tata, JLR sales http://r.reuters.com/hex48s

GRAPHIC: Tata group by sector http://r.reuters.com/pag85t

FUNDRAISER

JLR's cash was the primary reason behind an improvement in Tata Motor's consolidated net adjusted debt to operating EBITDA ratio to 0.98 in the year to last March from 1.21 in the previous year, ratings agency Fitch said in a recent note.

The storied British carmaker, which makes sleek Jaguar saloons and rugged Land Rover SUVs, raised $500 million in fresh debt last month and said it would raise funds from capital markets and banks to fuel its capex as required.

Over the past month, 18 analysts have cut their Tata Motors annual earnings estimates by an average of 7.9 percent, six have cut their stock price targets and three have downgraded the shares to a 'sell', according to Starmine.

The carmaker's shares - valued at $16.5 billion and India's best performing blue chip last year with a gain of over 70 percent - have fallen 10 percent since hitting a record high on January 10, while the NSE index has lost 1 percent.

JLR contributed around 90 percent of Tata Motors' net profit in the last financial year, so the UK unit's margins are more closely watched by investors than those at Tata's domestic business. Tata has used JLR's cash flows to service the debt raised to buy the British carmaker for $2.3 billion in 2008.

"Net debt levels will rise as both India and the JLR business will be FCF negative," UBS Securities India wrote in a recent note on Tata Motors.

MARGIN PRESSURE

Tata's turnaround of JLR through the worst of the global financial crisis won it many plaudits, but plunging sales at its domestic business in recent quarters has meant the subsidiary has largely carried its parent.

Analysts on average expect Tata Motors to post quarterly net profit of 28.9 billion rupees, according to Thomson Reuters Starmine, down 15 percent on a year ago - and the first drop in profit since September 2011.

Much of that is down to a slide from JLR's blockbuster operating margins of more than 20 percent in the year-ago quarter, due in part to a shift towards less profitable models.

UBS expects JLR operating margins of 12.8 percent for October-December. Nomura predicts 13-14 percent. JLR's operating margin has fallen year-on-year in the past two quarters and stood at 14.8 percent at end-September.

The cheaper, lower-margin Evoque and Freelander compact sport utility vehicles accounted for 52.5 percent of all Land Rover retail sales in the quarter, up from 43.7 percent a year earlier, according to company data. Last month, the two models made up 54.9 percent of all Land Rover retail sales, driving up total JLR sales by almost a third, while, overall, Tata Motors' sales fell 16 percent - a third decline in as many months.

The pound rose 0.7 percent against the dollar during the quarter, denting profits earned in the United States. North America made up around 17.8 percent of JLR's sales.

In China, the world's biggest autos market, JLR's sales jumped 71 percent last year, making it the marque's No.2 market after Europe. The company is investing $1.7 billion with local partner Chery Automotive to build a factory in China, where luxury car sales are expected to continue posting double-digit growth. (Editing by Ian Geoghegan)