Speed breaker in sight for TaMo’s JLR?

Tata Motors Ltd’s (TaMo’s) British subsidiary Jaguar Land Rover Automotive Plc (JLR) has come a long way – from failing to meet the margin target in FY23 to raising guidance in FY24. Recall that JLR clocked an Ebit (earnings before interest and tax) margin of 2.4% in FY23, lower than the 5% it had guided for when the year began. For FY24, it raised its Ebit margin target to 8% from 6% plus earlier.

JLR expects volume in the second half of FY24 to be better led by higher production and capacity expansion for high-margin products – the Range Rover and Range Rover Sport models. In the September quarter (Q2FY24), JLR’s Ebit margin fell by 130 basis points (bps) sequentially to 7.3%, led by low margin products.

While FY24 is likely to be a strong one for JLR, the next fiscal year could break the momentum. Concerns about demand for JLR cannot be ruled out even though it is a luxury brand.

Note that German car company Porsche has warned that the luxury sector is also feeling the heat of reduced consumer spending due to rising interest rates.

Now, aided by a rise in production, JLR’s order book has fallen by around 5,000 units per month over the past three quarters. This is not comfortable. JLR’s order book stood at 168,000 units at the end of September. This is expected to fall to 110,000 units by the end of FY24. JLR plans to focus on brand activation to support the order book. HDFC Securities suggests that one of the margin headwinds for JLR in FY25 could come from rising costs as it moves from a “demand pull” to a “sales push mode”, meaning it will have to offer higher discounts to attract customers.

In the domestic business, Tata Motors’ commercial and passenger vehicle (PV) segments are yet to increase market share. But their Q2 Ebit margin rose sequentially in the segments. Jefferies India is positive on truck demand in India.

But the brokerage sees demand concerns in PVs leading to a 3-4% decline in industry volume growth estimates over FY24-25.

As things stand, Tata Motors shares have risen by as much as 67% in 2023 so far, suggesting that investors are adequately pricing in the positives.

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