New Delhi, Sep 14: Fitch Ratings has revised the outlook on the Tata-owned marquee auto firm Jaguar Land Rover, which is facing Brexit and currency headwinds, to negative from stable, but affirmed ratings on its debt at BB+.
After being the cash-cow for Tata Motors since 2010, JLR reported a net loss in the quarter to June 2018 as the rising public aversion to diesel cars and the increasing uncertainty over Brexit has only confounded the problem for the company. Earlier this week JLR had warned of production cuts and more problems if Brexit did not materialise the way it has been planned.
The agency cited a likely increase in JLR’s negative cash flow in the next two years due to the falling profitability and the risks from Brexit as it sells around 20 percent of its volumes in the EU markets.
JLR’s product portfolio is also heavily biased towards diesel, which accounts for 90 percent of its sales in Europe, while sales of diesel powertrain are falling in Europe.
“The outlook change to negative from stable reflects our projections of further negative free cash flow in the next two years before gradually recovering to positive towards the end of the year to March 2021,” Fitch said in a note from London Friday.
The agency cited falling profitability as another key reason for the downgrade. Higher production and labour costs burdened JLR’s profitability but margins were particularly impacted by the rising depreciation costs from recent investments.
“Adjusted pre-tax margin fell further in FY18 to 1.6 from 4.8 percent in FY17 and 12.4 percent in FY15 despite increasing revenue. Depreciation will continue to weigh on profitability but we expect this to be partly offset in the medium term by improvements in productivity and savings in the manufacturing process,” the agency said.
It sees the pre-tax margin to increase moderately to around 2 percent in FY19 and to recover gradually to 5-7 percent through to FY22.
Blaming the rising investment burdening the free cash flow, the report said the increased focus on EVs, autonomous driving and shared mobility is offsetting the gains from lower investments in other areas and cited the recently launched I- Pace as a drag on group profitability and cash generation.
“Free cash flow fell significantly in FY18 to negative 4.2 percent and we expect a further decrease to around negative 6 percent in FY19. Higher spending during 2019-21 than in our previous assumptions will keep cash flows in the negative territory until at least 2020,” it said.
The company has lined up a capital expenditure of around GBP 4.5 billion annually for the next many years.
On the impacts of Brexit, the report notes that the company sells about 20 percent of its vehicles in both continental Europe and the US, but builds them quasi-exclusively in Britain, making it particularly exposed to Brexit issues and risks related to potential increased global tariffs.