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JLR Prospects Lauded As Discovery Launch Nears


JLR Prospects Lauded As Discovery Launch Nears.

Investors Reckon High Profit Margin Period Looms.
CO2 Challenge Might Induce Stumble Though.

As Jaguar Land Rover (JLR) prepares to unveil its new Discovery SUV at the Paris Car Show, investors are getting excited about the company’s long-term profit prospects.

Investment bank Morgan Stanley said JLR, owned by Tata Motors of India, is approaching a period of high profit margins, thanks to new products like the Land Rover Discovery, the recently launched Jaguar F-Pace and mid-size Range Rover next year.

“2016 was the year of low average selling price (ASP) low-margin Jaguar models; 2017 will be the year of the high ASP, high margin Land Rover models,” Morgan Stanley analyst Binay Singh said.

“We expect retail sales (of the new Discovery) to start from early 2017; the model’s success will be a key driver of Fiscal 2018 earnings,” Singh said.

JLR pre-tax profits fell to £1.56 billion in the year ended March 31, from £2.6 billion in the previous year. Profits were hit by slowing sales in China where margins are much higher than in the rest of the world. About one quarter of JLR’s sales are in China, where it opened a factory in 2014.

“We believe (the new Discovery) will be margin accretive. JLR’s last few launches have been margin-neutral to dilutive, but we believe the new Discovery will show the benefits of pricing and sharing a platform with Range Rover/Sport,” Singh said.

Citi Research was impressed too.

“A combination of improving model cycle at JLR plus a weak British pound should benefit JLR’s margins and improve free cash flow generation over the medium term,” said Citi Research analyst Jamshed Dadabhoy.

Dadabhoy said investors should look beyond short-term losses on JLR’s currency hedging after Brexit and think about improved sales and profit margin tailwinds after the second half of the 2018 financial year.

Average age declining
“As new JLR products like the F-Pace, Evoque convertible, next-generation Discovery, new small Land Rover Sport and next-generation Range Rover are introduced over the next two years, the vehicle portfolio age should decline to 2.9 years from 3.8 years, closing the gap with the German peer-set and reducing the need for discounts,” Dababhoy said. 

Bernstein Research also jumped on the band wagon, saying JLR’s policy execution looks “stellar”.

“We remain enthusiastic about JLR’S growth prospects,” said Bernstein Research’s Robin Zhu.

Fitch Ratings said it expected a JLR EBIT (earnings before interest and tax) margin of between 7 and 8 per cent in the financial year ending next March, and the next year too, although it cautioned that increased competition, margin pressure in China, and continued uncertainty about the outcome of Britain’s vote to leave the E.U. (Brexit) were problems to be faced. 

The EBIT margin was 8.5 per cent in the year ended last March, down from 12.4 per cent the previous year, according to Fitch. The margin dropped to 5.2 per cent in the first fiscal 2017 quarter because the post-Brexit fall in sterling hurt JLR’s payments to suppliers in Euros. Adjusted for this impact, the EBIT margin was 7.4 per cent, Fitch said.

Fitch expects retail volume to rise by about 10 per cent in the current financial year. It said 60 per cent of JLR’s sales are now outside the U.K. and Europe.

“Tightening carbon dioxide (CO2) requirements in both developed and developing countries remain a challenge for JLR, as its product portfolio is currently weighted towards larger, less fuel efficient SUVs. However further broadening of its product line to include more compact, fuel-efficiency models would reduce its exposure to the risk of evolving environmental legislation,” Fitch said in a report.

Faster growth
Citi Research’s Dadabhoy warned that recent strong global expansion in auto markets globally will begin to slow, but JLR should be able to grow substantially faster than the market.

JLR will thrive because “a) much faster growth we expect for JLR versus peer set and b) the prospect of margin improvements from the second half of fiscal 2018 and beyond,” Dadabhoy said.

In September, JLR announced it had started work on constructing its new factory in Slovakia, which will have an initial capacity of 150,000 vehicles a year. This could be doubled. The new factory should start production in 2018, according to JLR.

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