Jaguar Land Rover Stepping Up Investment To Boost Sales

Most of Tata Motors‘ (NYSE:TTM) value comes from its luxury vehicle division Jaguar Land Rover, according to our estimates. The British marquee brand sold 462,678 units last year, almost a fourth of the number of vehicles sold by BMW, the global leader in luxury vehicle sales. So there is still a long way to go for Jaguar Land Rover. However, retail sales at both Jaguar and Land Rover have declined in the first two months of the year. Retail sales for Jaguar fell 1.8% year-over-year through the eleven months ended February in fiscal 2015. This year-over-year drop at both brands can be attributed to product launch factors. Volume sales for the Land Rover Defender fell in the last quarter (October-December) in anticipation of the revamped model next year, and the company was also lapping a strong volume sales growth for its New Range Rover in Q3 fiscal 2014. On the other hand, Jaguar volume sales fell as sales for the sedan XK and XJ fell by double-digit percents.

The automaker might look to keep supply in line with demand and ease-off shipping vehicles in the last quarter of fiscal 2015 (ending March), in order to avoid inventory pile-up and protect its premium brand image. In turn, wholesale shipments could be lower in Q4, dragging down revenue growth. Tata Motors reported a mixed bag of results in Q3, with revenues rising 9.6% year-over-year, while profits before tax declined 6.4%. ^[1] In order to boost vehicle sales in the future, Jaguar Land Rover (JLR) has stepped-up investments in manufacturing and engineering facilities, and model makeovers. This could help JLR reach nearly 840,000 annual unit sales by the end of this decade, an 80% jump from our estimated fiscal 2015 unit sales numbers for the British automaker, but higher investments will also pressure margins in the near term.

Trefis’ price estimate for Tata Motors is $50, which is above the current market price.

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JLR Increases Investments In Domestic And Overseas Markets

Jaguar Land Rover produced all of its vehicles in the U.K. before last year, when it opened its first production plant outside the domestic market in China. The division will start local production in China this year and also launch its compact model in the country, in a bid to ramp-up sales. JLR will roll-out its locally built Range Rover Evoque in China in Q4 of this fiscal year, and follow this up with the introduction of two more models in the country in the next 18 months, in partnership with the Chery Automobile Company. On the other hand, the company started building its first fully-owned manufacturing facility outside the U.K. in Brazil late last year. The $290 million (750 million Reals) Brazil plant in Itatiaia, near Rio de Janeiro, will employ 400 employees, include an education and business center, and have an annual production capacity of 24,000 vehicles. By the end of fiscal 2016, JLR’s production capacity is expected to reach around 680,000 vehicles, including an initial annual production capacity of around 130,000 vehicles at the China plant.

But apart from overseas investments, Jaguar Land Rover is also increasing its investments in the domestic market. JLR is spending more than £400 million (approximately $600 million) in a plant near Birmingham. The expenditure at JLR’s Castle Bromwich site, where the new Jaguar XF will be built, includes the construction of a £320 million aluminum body shop. Sales of the XF fell 5% year-over-year in the eleven months to February. Last year, JLR announced that it is extending its manufacturing capacity in Solihull in the U.K., where the new Jaguar XE and the SUV F-Pace are being built. Both the models will be built on the same lightweight aluminum monocoque at JLR’s Solihull factory, where for the first time Jaguar models will be manufactured (only Land Rover models were built before this). The company has already invested £1.5 billion (around $2.3 billion) to support the introduction of its new aluminum and lightweight technologies, and plans to create 1,300 new jobs. JLR also opened an engine factory in Wolverhampton last year, underscoring its commitment to the domestic market.

Extending production capacity, both in the U.K. and overseas, will remove supply constraints at JLR, and could possibly fuel volume growth going forward.

However, spending a lot on model makeovers and new production facilities, while unit sales remain low, could pressure Jaguar Land Rover’s margins in the near term.

Jaguar Land Rover spent approximately £2.3 billion ($3.5 billion) through the first nine months of fiscal 2015 for this purpose. The British marquee car maker was earlier expecting capital expenses to range between £3.5-3.7 billion this fiscal, but has lowered its full fiscal outlook to £3-3.2 billion ($4.6-4.9 billion). ^[2] Although lower than previously expected, JLR will still spend around 12.5-13.5% of its revenues on CapEx and product development, and expects the figure to range between £3.6-3.8 billion next fiscal. Large investments are likely to hurt JLR’s cash flow in the near term, but the company has around £4 billion of cash and cash equivalents and £1.5 billion of undrawn credit lines, which will support investment plans in the near future.

Our outlook for JLR suggests that while cash flow growth for the company might remain limited due to large investments, expanding their production footprint in low-cost countries and near to the end customer could boost unit sales in the future, and also fuel margin growth. This is as automotive companies tend to have a high degree of operating leverage, thus being sensitive to fluctuations in volume sales. In addition, JLR might look to open more manufacturing facilities in regions such as North America, where retail sales remained flat through February, despite the largest automotive demand in the U.S. in 2014 since 2006. Local production could make JLR more competitive on a pricing front, enabling the company to better compete with the likes of BMW, Audi, and Mercedes-Benz going forward.

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1. Tata Motors press release [↩]
2. Tata Motors earnings transcript [↩]