Tata Motors-Owned JLR's Future Depends On A Juggling Act

The transformation of Tata Motors Ltd.’s British arm Jaguar Land Rover Automotive Plc into an electric luxury carmaker will face multiple challenges as the capex intensive exercise may hurt the focus on profitability amid chip shortages.  

The recessionary risks in western markets, a limiting zero-Covid policy in China as cases continue to rise, and a delay in generating free cash flows due to lower production amid shortages of specialised semiconductors have together cooked a perfect storm to derail the Indian automaker's ambitions for the twin luxury brands.

On top of all this, Chief Executive officer Thierry Bolloré, who unveiled the electrification plans last year under the ‘Reimagine’ strategy, resigned last week citing personal reasons.

“It's a need to deploy money on new technologies and electrify the portfolio to make company survive in long run” Puneet Gupta, director at S&P Global Mobility, said. “The company today is making losses but its due to war crisis which is leading to Recession across the markets, which makes the problem a little deeper for the company”

The U.K.-based company has made losses for four consecutive years on a trot and the trend is likely to continue for the fifth time in the current fiscal.

The loss narrowed to £818 million in the year ended March, from £1.1 billion in the preceding year. In the pre-Covid year of 2019-20, the loss stood at £471 million.

Compare this with the planned annual spend of £2.5 billion on the electrification strategy and the problem becomes clear. This capex is majorly to make Jaguar an all-electric brand by 2025 and to launch six pure electric variants for Land Rover in the next four years.

With the tightrope of finances and the risks mentioned above, the target to become net debt-free by 2025 also seems far-fetched.

Gupta said the company might have to improve cashflows and cut on expenditure especially in markets where they are losing money.

Sales in the current year have also been lower-than-expected as shortage of few specialised chips kept the company from achieving the desired scale. The total retail sales fell 23% year-on-year to 1.67 lakh units in the six month ended September.

After the disappointing sales at JLR and losses in the second quarter, analysts cut estimates for the parent Tata Motors for the current fiscal.

The luxury carmaker’s management also lowered its guidance for the financial year ending March.

It now expects to maintain just positive EBIT margin for the current fiscal, compared with the earlier guidance of 5%. It also expects to break-even at the free cash flow level in the period, against the earlier indication of £1 billion free cash flow for the year.

While the company says it has finalised the long-term agreements to secure adequate supply of semiconductors, the outgoing CEO also highlighted the complexity of the problem in the investor call post second-quarter earnings.

"We can see improvements, but it's going to continue when I'm discussing with the CEOs of all the industry. It's going to continue in the coming years," Bolloré said in the call. “It's not a matter of months or quarters, but it's going to be a matter of years before we come back to a situation which is much more normal than what we can see today."

As inflation rises and borrowing rates go higher, the environment may become even more adverse with recessionary risks already looming over the world.

In this intersection of challenges, the margin of error thins out.

The new CEO will have his task cut out: to don a juggling hat and put on a perfect show.