Volume recovery, margins key to Jaguar Land Rover taking the wheel

Subsidiary of TaMo's India biz continues to expand on volumes, market share

Multiple headwinds for its UK-based subsidiary Jaguar Land Rover (JLR) led to weaker-than-expected performance of Tata Motors in the April-June quarter (first quarter, or Q1) of 2022-23 (FY23). While brokerages were expecting a lukewarm display, JLR’s performance missed those low-key expectations.

JLR’s operating profit was down 38 per cent over the year-ago quarter and over 30 per cent lower than estimates.

Profitability, too, took a hit, halving from the 12.6 per cent in the January-March quarter of 2021-22 to 6.3 per cent in the June quarter.

The margin hit was on account of lower production because of supply (chip shortage) interruption, together with a weaker model mix (lower proportion of the older Range Rover and the Range Rover Sport) and unfavourable geographic mix, as the share of a more profitable China market declined.

While there were multiple challenges that were difficult to navigate during the quarter, brokerages believe the situation has bottomed out. The order book increased to 200,000 vehicles, with the new Range Rover, the Range Rover Sport, and the Defender accounting for 60 per cent of bookings.

Say Rishi Vora and Eswar Bavineni of Kotak Institutional Equities (KIE), “With improvement in chip availability, we expect operating performance of the company to improve from the current quarter. This will be led by operating leverage benefits, aided by strong order backlog on account of new launches, as well as demand recovery from China and correction in the raw material basket.”

They, however, warn that the ongoing geopolitical tensions between Russia and Ukraine could play spoilsport if the company is unable to ramp up its production volumes.

While KIE has a ‘buy’ rating, not all brokerages are convinced about JLR’s prospects, given the recessionary concerns in its key markets like the US and Europe and slowdown in China, apart from persistent supply constraints.

HDFC Securities has a ‘reduce’ rating and says JLR’s targets (>7 per cent earnings before interest and tax margin by 2023-24 and >10 per cent by 2026-27, market-share gain in key geographies, and net debt-free status by 2024-25) appear highly ambitious.

Aniket Mhatre and Sonaal Sharma of the brokerage say that market-share gains are difficult to achieve as JLR lags global peers in electric vehicle transition. The shift is margin-dilutive and all global luxury peers are pushing harder for investments in evolving technologies.

The India business, however, delivered a robust performance. The commercial vehicle segment is benefiting from cyclical recovery and registered a volume growth of 104 per cent, although realisations were flat, compared to the year-ago period.

Passenger vehicle revenue growth of 122 per cent was led by doubling of volumes (utility vehicles) and market-share gains of 22 basis points.

Realisations, too, saw 5.5 per cent uptick, boosting the top line.

Margins for both businesses expanded year-on-year, while they contracted on a sequential basis. While volumes improved, the India business had a negative-free cash flow due to adverse working capital position.

Analysts at Motilal Oswal Research believe that the India business should benefit from continued demand recovery in commercial vehicles and production ramp-up in passenger vehicles.

Given a muted Q1 showing, the stock was down a bit, even as most benchmarks and the broader market indices ended higher.

Investors should await consistent volume delivery from JLR and margin gains before considering the stock.