British drivers often imagine Jaguar Land Rover as an indigenous rival to BMW Audi or Mercedes. Investors know it is not — and unlikely to ever become one. True, the cars themselves are a vast improvement on those of yesteryear. The hefty depreciation of these old lemons bore witness to their patchy quality compared to German luxury marques. But the company’s first-quarter results, released overnight on Wednesday, show the challenges it still faces.
Shares in parent company Tata Motors fell 6 per cent after the numbers were published although that also reflected issues in the Indian parent’s largely lossmaking domestic business.
JLR was barely profitable in the first three months of its financial year. Pre-tax profit was up largely because of a £400m credit relating to changes in its defined benefit pension scheme. At the operating level, the benefit of a weaker pound was not enough to offset higher raw material costs and bigger discounts on its cars. Expenses grew twice as fast as sales. Adjusted operating margin fell to 5.3 per cent, below the level of German rivals.
Weaker profitability is partly a function of heavy investment; JLR is expanding production and launching models like the Range Rover Velar, which fills an important gap in the range. In theory, sales volumes should pick up later this year. The same arguments apply to Volvo, another Asian-owned carmaker with comparable unit sales to JLR and a similar bias to premium SUVs.
But JLR capitalises more of its development expense than other carmakers. Almost four-fifths of such spending was parked on the balance sheet in the first quarter — compared to about half at Volvo and typically 30 per cent or so at the German groups. Amortising this pile of intangibles will reduce profits in future, even if the cash is being consumed now. Free cash flow was minus £1.3bn in the first quarter. Volvo looks set to share more of its future development costs with the wider Geely group. JLR’s overlap with the rest of the Tata Motor empire is more limited.
JLR is well funded, with net cash and undrawn credit lines. And no one seems to mind heavy investment in new vehicles that sell in relatively small volumes when Tesla does it. But Tata is not Tesla — and JLR will need to show sales are picking up before its parent’s shares can accelerate.
The Lex team is interested in hearing more from readers. How robust a business is JLR these days? And what do you think of the cars? Please tell us what you think in the comments section below.
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