Why “Brexit” Might Be Bad News For Tata Motors?

-62.32%
Downside
25.14
Market
9.47
Trefis
TTM: Tata Motors logo
TTM
Tata Motors

Tata Motors’ fears of a significant loss in the revenues of its subsidiary Jaguar Land Rover (JLR), in the event of Britain’s exit from the European Union (EU) have been realized. The company had estimated a revenue decrease of nearly $ 1.37 billion (1 billion pounds) in this event, which is now emerging as a reality. This hit is expected to come from a 10% levy on vehicles being exported to Europe (produced in the U.K., which would no longer be part of the EU) and 4% levy on import of components for the production of vehicles. While some experts believe that after its exit from the EU, Britain might provide incentives to automakers to negate the impact of these levies, this strategy would take some time to arise. In May 2016, Europe accounted for more than 25% of JLR’s sales by volume. Sales in Europe for Jaguar models had witnessed a nearly 300% increase compared to the same month in the previous year. Imposition of taxes to sell these vehicles in other European countries will make these vehicles less competitive in terms of pricing.  If the company does not pass on the levies to consumers, it will impact profitability by bringing down the average revenue per vehicle.  Both units sold and revenue per vehicle, are significant drivers of the valuation of Tata Motors for its Jagaur and Land Rover divisions.  According to our estimates, both these segments together account for more than 90% of the valuation of Tata Motors.  Moreover, we expect both of these models to witness a steady rise in units sold over our forecast period, with revenue per unit sold remaining almost stable during our forecast period.

Diversified Production, Government Incentives – Silver Lining

The dark clouds over JLR’s profitability do have a silver lining. The company is building 300,000 units per year at an assembly plant in Slovakia, which is a part of the European Union.  Thus, the vehicles produced in this plant will not be subject to tax levies. This plant is expected to start production in 2018, which coincides with the tax impositions.  Experts also believe that the UK government will work out a strategy to incentivise the automobile industry, which is its largest employer, in the next 2-3 years before the tax barriers kick in.

Relevant Articles
  1. Tata Motors Stock Up After Announcement Of Investment In EV Business, Will It Sustain?
  2. Will Tata Motors Achieve Pre-Corona Stock Price?
  3. Can Tata Motors Stock Grow After A Slowdown Warning?
  4. Is Jaguar Land Rover 50%, 70%, Or 80% Of Tata Motors?
  5. Why Tata Motors Stock Has Rallied 30% Over The Last Week
  6. How Does Tata Motors Compare Against A Giant Like Toyota Motors?

Tata Motors been on a turnaround path, with a new domestic CEO and JLR sales picking up.  “Brexit” thus comes as a blow to the company. The exact impact of the tax barriers and benefits from the incentives will only be known in future.  Still, the company’s strategy to diversify production across the EU should work to its advantage.

.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research