Street positive on JLR's electric vehicle strategy, sales outperformance

Higher volumes needed to offset the near term pressure on financials

After reporting strong wholesale numbers for the fourth quarter of the 2022-23 financial year (Q4FY23), Tata Motors’ subsidiary, JLR, has now released information above its plans to go electric as well as changes in its brand strategy. Since JLR generates over 80 per cent of the consolidated revenues for the company, these are crucial.
 
JLR will spend $18.68 billion over five years to push its electric vehicle (EV) strategy, as well as on autonomous technology, artificial intelligence (AI) and digital technologies, among others. The management has guided for a capex of $3.11 billion for FY24, increasing to $3.74 billion for FY26.
 
The Halewood plant in Merseyside, UK, will become all electric, and Engine Manufacturing Centre in Wolverhampton, UK, where it designs its internal combustion engines, will become the electric propulsion manufacturing centre. JLR is also adopting a new House of Brands (HoB) approach as part of its Reimagine strategy.
 
The next generation medium- size SUV architecture is to be pure EV and an all-electric Range Rover will be launched later in 2023. Three reimagined modern luxury electric Jaguars are to be launched as well.
 
The HoB approach is to amplify the unique character of each of its brands - Range Rover, Defender, Discovery and Jaguar -- as it transitions to being a modern, luxury, electric, company.
 

JLR will reposition to being an electric-first, modern luxury carmaker by 2030, while guiding towards its financial goal of being net cash positive by FY25 and generating a double-digit Ebit (earnings before interest and tax) margin by 2026.
 
The company also confirmed that it will invite pre-orders for the modern luxury all-electric Range Rover later this year. An all-electric model from the Range Rover family will launch in 2025. But JLR will retain the flexible modular longitudinal architecture (MLA) on which Range Rover and Range Rover Sport are built, offering internal combustion engine (ICE), hybrid and battery electric vehicle (BEV) options. This gives JLR flexibility.
 
The market received this announcement positively. Analysts seem to think that the de-leveraging and Ebit margins targets are feasible, though JLR has missed earlier guidances for free cash flow and it is pulling back from an earlier guidance that it would be net cash positive by FY24. The target for double-digit Ebit margin has also been postponed by around three quarters to the 2026 calendar year. However, the investments may have a negative effect in the short term on the financials and may raise the volumes at which break even could be achieved.
 
The stock saw an earlier surge when the reported sales of JLR (ex-China JLR) of about 95,000 units, was higher than Street expectations of 80-85,000 units and guidance of about 81,000 units. These volumes were driven by easing chip shortages and future projections were boosted by a strong order book of 200,000 units at end-FY23.
 
JLR will post free cash flow of $996 million in Q4, and overall, $622 million in FY23, wiping out accumulated losses. Analysts reckon Tata Motors will be able to reduce net debt, and the domestic prospects are also expected to improve.