Why it's a rough ride ahead for Jaguar Land Rover

JLR, maker of Jaguar luxury cars and Land Rover SUVs, reported a 62% decline in net profit in Q3FY17

With a dismal third quarter performance at Jaguar Land Rover, mainstay of the country’s biggest automobile company, Tata Motors, hopes are being pegged on the fourth quarter. Profitability, however, is not expected to see an immediate improvement, prompting brokerages to revise the target price downwards while advising clients to buy the stock that has tanked 14 per cent since Tuesday.

C Ramakrishnan, group chief financial officer at Tata Motors, said the company expected a strong fourth quarter for JLR and the management remained “cautiously optimistic” about JLR in the coming quarters. “The start of new Discovery wholesales, peak March UK sales and other seasonal factors should support a solid final quarter,” JLR said in an investor presentation.

JLR, maker of Jaguar luxury cars and Land Rover SUVs, reported a 62 per cent decline in net profit for the October-December quarter of 2016-17. Profit tanked to £167 million from £440 million in corresponding period of 2015-16 on a combination of factors, including higher marketing expenses, a less favourable product mix and a weaker pound leading to forex losses.

The wholesale volumes in the third quarter, which has been the worst quarter of the year, also declined 5 per cent. These factors led to a lower Ebitda (earnings before interest, depreciation, taxes and amortisation) margin of 9.3 per cent, the weakest in several recent quarters and significantly lower than 14.4 per cent in the third quarter of 2015-16. 

JLR anticipates the medium-term margin to sustain in a range of 14-16 per cent but it could take a few quarters to reach that level since hedging losses are forecast to continue for up to four quarters. 

The October-December quarter was the third consecutive quarter when hedging losses impacted profitability. These were Rs 3,510 crore as Tata Motors had hedged US receivables prior to the Brexit vote that weakened the pound. The performance of JLR led to a 96 per cent decline in Tata Motors’ consolidated profit in the quarter to Rs 112 crore. 

“Margins were impacted as several negatives converged simultaneously. The company expects a recovery in margins in the fourth quarter, led by stronger wholesales volumes and the fact that the Discovery launch costs are now behind it,” Edelweiss said in a note capturing highlights of the investor call. 

Kotak Securities said it expected a gradual improvement in JLR’s Ebitda margin as the forex hedge rate approached spot rates in the next two years. Volume growth will likely remain strong led by a fresh and young model line-up.

In the standalone performance of Tata Motors, which includes the domestic car and commercial vehicle business, there is no sight of profitability either. The sharp increase in car sales in the third quarter (25 per cent) did not aid profitability. The medium and heavy commercial vehicle business declined 9 per cent. Losses in domestic operations climbed to Rs 1,046 crore, from Rs 137 crore.

• JLR reported a 62 per cent decline in net profit for the quarter-ended December
• Profit tanked to 167 million pounds from 440 million pounds in the corresponding period of 2015-16.
• Higher marketing expenses, a less favourable product mix and a weaker pound leading to forex losses led to the decline
• Hedging losses during the quarter were Rs 3,510 crore as Tata Motors had hedged US receivables prior to the Brexit vote that weakened the pound