Job cuts, falling sales: Tata Motors’ cash cow JLR faces multiple challenges

The weekend was not a happy one for employees of Tata Motors Ltd’s unit Jaguar Land Rover Ltd (JLR) in the UK. The firm announced about 1,000 job cuts and relocation of some of its employees around plant locations. Reacting to this, on Monday investors dumped shares of Tata Motors that fell 5% to Rs338.95 apiece at the close of trading. The stock is now 27% down since 1 April 2017, a pathetic performance compared to benchmark indices such as the Sensex and BSE Auto index, both of which have rallied by 16%.

Indeed, the management may justify the job cuts as affecting only temporary jobs, which is done to manage the business and production cycles. However, the writing on the wall is clear. JLR is facing tough times with a sales slowdown. For the first time in eight quarters, the company’s sales contracted by 3.8%, although growth rates were coming off for a while now (see chart).

An analysis of region-wise sales numbers shows that JLR is losing heavily in the UK. Retail sales fell by 13% in fiscal year 2018 (FY18) after double-digit growth for three years. The story is similar in Europe, where sales contracted by 5%. That’s not all—growth in North America plummeted to 5% from 24% and 27% in the earlier two years. For JLR, these three regions account for about two-thirds the total vehicle sales.

Reasons for the drop in sales range from stiff competition in the luxury segment to high tax rates on diesel cars to curb use of the fuel. However, some critics say the company has lost out on innovative new launches, which are important to lure customers in the high-end luxury market.

With US protectionism gaining momentum, there could be taxes on imported vehicles, which may further thwart JLR sales in the region.

The company ’s only saving grace is China, where sales are rising, although there too growth is slowing.

Certainly, a firm’s products going downhill in the market is the first sign of trouble from an investor standpoint as it affects the ability to grow earnings. The next is employee layoffs as it implies weak cash flows and the need to trim costs.

All this is against a backdrop of an imminent need for JLR to cough up billions to fund research on the next new wave of electric vehicles. This will hurt profit margins that are already ebbing away.

The March quarter forecast for JLR is about 10% operating margin, down from its heydays of 15-16%. Add to this the foreign exchange losses on hedges during Brexit that have also eroded profitability.

Thankfully, there is a sweet spot in that Tata Motors’ stand-alone business is booming on the back of a strong uptrend in commercial vehicle sales on home ground.

But the fact remains that it is JLR that accounts for more than 90% of consolidated profits at Tata Motors. Even a small sneeze in that company sends shivers down the Tata Motors’ stock.

One can anticipate a cut in earnings estimate on weak sales numbers and a tense outlook for FY19.livemint


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