Why Brexit matters to Jaguar Land Rover

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Mumbai: Britain’s exit from the European Union may impact the operations of Jaguar Land Rover Automotive Plc, the UK subsidiary of Tata Motors Ltd. The subsidiary accounts for 90% profits for Tata Motors.

“Jaguar Land Rover supports continued UK membership of a reformed EU. Access to our customers and suppliers is important to us—any changes could impact our sales, our costs and the skills base,” said a JLR spokesperson in an email response.

Later this week, on 23 June, the UK electorate will participate in a decisive referendum putting an end to the speculation around Britain’s exit from the European Union (EU). The outcome of the event is set to have a wide ramification for the stock markets, currencies, global economy and corporates. Closer home, among other firms, investors of Tata Motors, the flagship of Tata Group, are closely monitoring the event. Here is why it matters.

Volume and margin concerns: Europe accounts for a fourth of volumes for the UK subsidiary of Tata Motors. It also sources 35-40% of its components’ requirements from the region. Given the free movement of goods within the EU, JLR does not pay any tariff either for sourcing of parts or selling a vehicle in any of the European countries. However, in the event of Brexit, this may change as the goods sold to and from the EU may attract duties making JLR uncompetitive vis-à-vis the German rivals. This, in turn, will have an adverse impact on the company’s margins and volumes, said brokerage CLSA in a note on 16 June.

Others too are concerned. “This event could be negative for JLR in the short term as it would raise issues of a fiscal deficit, lower UK growth and adequate manpower shortfall. However, there would be multiple indeterminable variables which can vary the level of impact on JLR,” wrote Rohan Korde, analyst at brokerage Prabhudas Lilladher, in 15 a June report.

Based on the strong margin performance—15% for fiscal 2015-16, which came on the strength of new model launches and better geographic mix—analysts estimate the JLR margin to expand 15-16% for the next two years. These estimates. however, will have to be lowered if Britain leaves EU.

In the year ending March 2016, JLR sold a total of 5.21 lakh units in the retail market, up 13% over the last year. The contribution of Europe in the company’s total sales rose 24% during the year from 19% a year ago. Europe and the UK together account for 44% in JLR’s global volumes.

The UK could join the single European market or have free trade agreements with the EU, which can foster bilateral trade even in the Brexit scenario. Countries such as Norway and Switzerland are not part of the EU but have access to the single market either through the European Economic Area or bilateral ties. However, this might take time and there could be a negative impact on JLR in the interim, said the CLSA report. The Brexit is also likely to slow down and disrupt the UK economy, affecting the company’s sales in the home market, said analysts who declined to be identified.

Currency risk: The Brexit will also make JLR vulnerable to currency volatility. The Great British Pound (GBP), which has been depreciating since the talks of Brexit started, is expected to depreciate further if Britain quits. Year-to-date, the GBP has lost 3.33% against the US dollar. While this may benefit JLR as it exports 80% of its produce, it will also inflate the company’s import bill. However, if trade tariffs become applicable, German luxury cars would also become more expensive in the UK and JLR could gain market share in its home market, said the CLSA note. “We note that the benefit of a weaker GBP could actually come earlier than any potential adverse impact of import tariffs,” it said.

Manpower issues: JLR’s skill base too is likely to get affected should the British electorate vote in favour of Brexit. It would hinder the mobility of labour within the EU and the UK. JLR requires highly skilled manpower for its operations; most of them are drawn from Europe. Restricted immigration, which could become a reality after Britain’s separation from the EU, will impact the company, said an analyst at a domestic brokerage.

To be sure, to some extent, the Brexit concerns have been weighing on Tata Motors’ stocks. It closed at Rs.470.25, a 52-week high on 9 June. It ended at Rs.463.20 on 17 June. The benchmark Sensex closed at 26,625 points, up 0.38%, on the same day. Analysts expect it to lose more momentum as the voting day draws closer.