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JLR Ratings Cut Again, But Profit Turnaround Expected

JLR Ratings Cut Again, But Profit Turnaround Expected.

“We expect the EBIT margin to increase to 4% in financial 2022 as the effect of higher margin model launches is felt,”

Financially troubled maker of luxury SUVs and sports cars Jaguar Land Rover (JLR) has been boosted recently by its decision to accelerate electric car production, and a $626 million loan guarantee from the British government.

But British-based and Tata Motors of India owned JLR was reminded of reality Tuesday when Fitch Ratings downgraded some of its debt, citing weakening markets, high investment spending requirements, the prospect of a “disorderly” Brexit, and worries about tariff wars.

Fitch said JLR is the most exposed premium manufacturer to a Brexit which doesn’t include an agreed plan between the EU and Britain.

But it also said current JLR losses will turn into small profits next year, and larger ones by 2022.

This comes after Moody’s Investors Service downgraded some of JLR’s debt in June because of its continuing troubles in China, and similar worries about the huge amount of capital required to fund electrification.

JLR reported a loss of $4.6 billion for its financial year ended March 31. JLR has said it was cutting 4,500 jobs as part of a turnaround policy. In November last year JLR announced a plan, “Charge and Accelerate”, to slash $3.2 billion in costs over the next 18 months.

Fitch said JLR is handicapped by its small size compared with the competition from Mercedes, BMW and Audi.

“JLR’s business risk profile is negatively affected by its small scale relative to investment grade auto manufacturers as well as its high operating leverage. JLR’s margins and cash flow were sharply affected by declining sales in China and Europe,” Fitch said in a report.

“Countering the sales slowdown over the last twelve months has been cost reductions in U.K. manufacturing and the move to lower cost manufacturing in Slovakia to support new model lines. Fitch expects volumes to remain relatively flat for the 2020 financial year as it forecasts negative sales growth in Europe and flat sales in China,” the report said.

Fitch expects JLR’s EBIT (earnings before interest and tax) margin to recover to between 1%-2% in financial years 2020 and 2021, from negative 1.8%, excluding write-downs, in the financial year ended March 31.

“We expect the EBIT margin to increase to 4% in financial 2022 as the effect of higher margin model launches is felt,” Fitch said.

As JLR has stumbled, reports gathered pace that Tata Motors would seek to sell it, with PSA Group of France the likely bidder. But Tata has fiercely denied the plan. In a report earlier in June, Berenberg Bank of Hamburg, Germany, doubted there would be a bid for JLR because its cost structure was already close to benchmark levels.

Other analysts have disagreed, saying JLR could solve one of its biggest problems – upcoming CO2 regulations in Europe – by merging with PSA and lower its CO2 rating after merging with the French company’s best in class performance on fuel economy. JLR, which sells more than 20% of its vehicles in the U.S., would also provide PSA Group with a foothold there.

In the report, Fitch reckoned JLR’s plans would start to work in a couple of years.

“We expect investment spending to remain high at between ($4.4 billion-$5.0 billion) from financial years 2020 through 2022. Fitch expects investment in new models, such as the Defender and Range Rover replacements, to bolster revenue and profitability in financial 2021 and 2022. JLR’s investments in electric drive-train and battery plants should protect the company from capacity constraints in electric vehicle production, and ensure the supply chain remains under JLR’s control for future production,” the report said.

Fitch said JLR’s over-reliance on diesel power is being corrected and accounted for 71% of sales in the last financial year, down from over  90% the previous year.

“This could be reduced by JLR’s plans to offer the option of electrification on all of its vehicles from 2020. JLR’s early introduction of PHEV (plug-in hybrid electric vehicle) technology has improved sales of its high-end SUVs compared to its rivals,” the report said. 

In June JLR and BMW announced a plan to collaborate on developing electric motors and transmissions.


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