* Tata Motors seen posting first profit fall in 5 qtrs
* JLR margins down on less profitable cars, currency shifts
* UK unit to be cash flow negative in Q3, FY14
* JLR has been propping up its struggling Indian parent
* JLR sales up 30 pct in Jan, total Tata sales fall 16 pct
By Henry Foy
MUMBAI, Feb 14 Hit by falling margins and rising
capital expenditure, roaring Jaguar Land Rover (JLR) may be
heading for a speed trap.
Rising investment is eating into the luxury carmaker's cash
pile and raising the prospect of fresh borrowing, while falling
profitability is set to tip parent Tata Motors into a
first drop in profits in five quarters.
Increasing reliance on lower-margin models such as the Land
Rover Evoque and Freelander and adverse currency movements will
dent October-December results due later on Thursday, as JLR's
free cash flow (FCF) turned negative just months
after it paid its weaker parent a maiden dividend.
Negative cash flow will continue in the next financial year,
JLR says, as the carmaker that has propped up its Indian owner
for the past 18 months starts a 2.75 billion pound ($4.3
billion) a year splurge on its plants and product pipeline.
"Over the next couple of years, they are unlikely to
generate much cash. That's a worry," said Joseph George, analyst
at IIFL Institutional Equities in Mumbai, one of seven with a
negative rating on the stock, according to Thomson Reuters
Starmine. "That's going to be a problem for Tata."
JLR had net cash of 437 million pounds ($684 million) at
end-September, but as it ploughs money into a new engine plant
in Britain and a factory in China, it will no longer be the
cash-generating driver for its struggling owner, Asia's
7th-biggest carmaker by market value.
JLR's cash was the primary reason behind an improvement in
Tata Motor's consolidated net adjusted debt to operating EBITDA
ratio to 0.98 in the year to last March from 1.21 in the
previous year, ratings agency Fitch said in a recent note.
The storied British carmaker, which makes sleek Jaguar
saloons and rugged Land Rover SUVs, raised $500 million in fresh
debt last month and said it would raise funds from capital
markets and banks to fuel its capex as required.
Over the past month, 18 analysts have cut their Tata Motors
annual earnings estimates by an average of 7.9 percent, six have
cut their stock price targets and three have downgraded the
shares to a 'sell', according to Starmine.
The carmaker's shares - valued at $16.5 billion and India's
best performing blue chip last year with a gain of over 70
percent - have fallen 10 percent since hitting a record high on
Jan. 10, while the NSE index has lost 1 percent.
JLR contributed around 90 percent of Tata Motors' net profit
in the last financial year, so the UK unit's margins are more
closely watched by investors than those at Tata's domestic
business. Tata has used JLR's cash flows to service the debt
raised to buy the British carmaker for $2.3 billion in 2008.
"Net debt levels will rise as both India and the JLR
business will be FCF negative," UBS Securities India wrote in a
recent note on Tata Motors.
Tata's turnaround of JLR through the worst of the global
financial crisis won it many plaudits, but plunging sales at its
domestic business in recent quarters has meant the subsidiary
has largely carried its parent.
Analysts on average expect Tata Motors to post quarterly net
profit of 28.9 billion rupees ($535.9 million), according to
Thomson Reuters Starmine, down 15 percent on a year ago - and
the first drop in profit since September 2011.
Much of that is down to a slide from JLR's blockbuster
operating margins of more than 20 percent in the year-ago
quarter, due in part to a shift towards less profitable models.
UBS expects JLR operating margins of 12.8 percent for
October-December. Nomura predicts 13-14 percent. JLR's operating
margin has fallen year-on-year in the past two quarters and
stood at 14.8 percent at end-September.
The cheaper, lower-margin Evoque and Freelander compact
sport utility vehicles accounted for 52.5 percent of all Land
Rover retail sales in the quarter, up from 43.7 percent a year
earlier, according to company data. Last month, the two models
made up 54.9 percent of all Land Rover retail sales, driving up
total JLR sales by almost a third, while, overall, Tata Motors'
sales fell 16 percent - a third decline in as many months.
The pound rose 0.7 percent against the dollar during
the quarter, denting profits earned in the United States. North
America made up around 17.8 percent of JLR's sales.
In China, the world's biggest autos market, JLR's sales
jumped 71 percent last year, making it the marque's No.2 market
after Europe. The company is investing $1.7 billion with local
partner Chery Automotive to build a factory in China,
where luxury car sales are expected to continue posting