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The 6% fall in Britain's currency so far this year against the US dollar could have an adverse impact on Tata Motors-owned Jaguar Land Rover's investments.
A report by BNP Paribas stated, "The weakness in GBP/USD will have an adverse impact from a balance-sheet perspective considering JLR's USD liabilities and proposed capex plans are in USD (China and to some extent the UK capex, will be US-denominated)".
JLR is in the process of making investments in China along with a local partner for a manufacturing joint venture. Further, the two premium brands are also augmenting a UK engine manufacturing center with an investment of $219 million.
"GBP has weakened 6% year-to-date against the dollar, which has been accentuated by Moody's downgrade of the UK credit rating. We estimate this balance-sheet position could negate 25-30% of the P&L gains", added the BNP Paribas report.
The management at Tata Motors has said that is expects margins to improve in the fourth quarter driven by healthy volume growth, improved product mix (higher Range Rover) and favorable currency (GBP/USD).
"Although 60% of JLR’s revenue is USD-denominated/proxies, we estimate it has a net negative EUR exposure of 15-20%, which would offset some of the gains. Depending on how the forex hedges are structured, we estimate every one percent weakness in the GBP/USD, Tata Motors could gain 1-2% on EBIDTA and 1.5 -2.5% on net earnings, post hedging", the report further added.
Tata Motors stock on the Bombay Stock Exchange closed 0.77% at Rs 301.4 lower compared to its Friday's close of Rs 303.75. More than 90% of the company's net profit is contributed by JLR.
