Tata Motors revs up on rising JLR sales, but the road ahead is misty

Jaguar Land Rover Ltd’s (JLR’s) rising sales have rekindled investor interest in parent Tata Motors Ltd’s stock. The stock has zoomed 37% in the past three months after touching a 52-week low of ₹106 on 4 September.

JLR’s outlook seems brighter now than a year ago. Between June and October, its wholesale monthly numbers increased on a low base of the year-ago period. Retail sales in China and North America, which account for about 45% of the firm’s total sales, have increased steadily over the last four months.

Another positive is that the firm’s mounting inventory in China is now at its lowest level since 2017. “JLR’s focus on improving dealer profitability and brand-led pull strategy in China has helped outperform its peers since July," said a Motilal Oswal Financial Services Ltd report. In the US, new launches have helped rev-up sales, up about 6% year-on-year in November.

Analysts reckon that the improving contribution of Land Rover on the back of new launches will give a leg-up to the company’s operating profitability.

That said, pain continues in a few markets. JLR’s UK and Europe sales are still declining. Brexit’s uncertainty continues to be an overhang. “JLR is the only luxury car manufacturer to have a facility in the UK. A hard Brexit will have a huge negative impact," said Bharat Gianani, analyst at Sharekhan Ltd.

Analysts said the outlook in Europe until 2020 is at best stagnant as consumers fret over a recession, while the industry battles tough emission and regulatory norms.

However, one cannot ignore JLR’s progress in cost, quality and time-to-market. The firm cut capital expenditures and contained working capital. This led to Q2 FY20 witnessing ₹583 crore in profit before tax, which stumped investors as they were expecting a loss.

“Yet, lower JLR profitability over the years and continued requirement for higher capex (to invest in new products and new technologies, especially electric vehicles) will see negative free cash flows till FY21," added Gianani.

On home ground, Tata Motors’ commercial vehicle (CV) sales will continue to contract in the near term, although it has a lower bearing on consolidated results.

Therefore, while the management’s arduous efforts to steer JLR back on track is reassuring for investors, it may be prudent to stay cautious in the near term.