A recovery in key markets of Jaguar and Land Rover —the US, Europe, China, the UK — coupled with cost curtailment efforts and tightly controlled capital expenditure will help Tata Motors group generate free cash flow at the business level and reduce debt to near-zero level, P B Balaji, chief financial officer, said at a recent investor meet organised by Motilal Oswal.
The other two pillars include monetisation of non-core assets and infusion of additional equity, Balaji said.
JLR is seeing an additional boost from strong demand for the recently launched Evoque and Defender. This and a strong product pipeline is making the firms’ management confident.
Additionally, the company is hopeful that the measures taken to pare fixed and variable costs, and bring down material costs will start paying off. This, combined with a higher share of pricier models in the overall mix, will help bump up the gross margins. The free cash flow generation plan will be based on revenue improvement, cost-cutting, and capex control plans laid out for key businesses including Jaguar Land Rover, domestic passenger vehicles, commercial vehicles, and vehicle finance.
The Mumbai-based firm has earmarked a capital expenditure of £2.5 billion for JLR and Rs 1,500 crore for the India business for FY21 and this is unlikely to see any change in the foreseeable future.
The capex will be guided by the “ability to invest” and not “willingness” to invest as has been the case in the past. The decision to invest will be closely linked to operating performance.
But not everyone is convinced. Mitul Shah, vice-president, research at Reliance Securities, said: “A lot will depend on volume sustainability in JLR and domestic passenger vehicle business.”
It will be tough for the company to get to the previous era of high historical margins, which was primarily driven by China, Shah said.
Others agreed. Mahantesh Sabarad, head of retail research at SBICAP Securities, said: “The target is achievable only if volumes show a sharp recovery and product mix gets richer, both look distant under the current circumstances.”
Addressing company’s shareholders on August 25, Tata Motors Chairman N Chandrasekaran had said the firm was aiming to be debt free in the next three years. The carmaker’s stocks have rallied since then. From the day of the AGM till date, it has gained 13.6 per cent. It closed at Rs 144.3 on Friday.
Tata Motors group has a net automotive debt of Rs 48,000 crore and currently the company is deleveraging the business substantially, Chandra had said.
Motilal Oswal’s research analysts, Jinesh Gandhi and Vipul Agrawal, are of the view that JLR has several levers, both cyclical and structural, which will bode well in meeting the targets. These include targeted cost-cutting of £1.5-2 billion (includes £300 million savings in depreciation post impairment), mix improvement (growth in Land Rover and China), operating leverage, cost savings on full rollout of the modular strategy, and the low-cost Slovakia plant.
“The convergence of multiple factors stated above could drive recovery in Ebit (earnings before, interest and tax) margins and leave scope for surprises on profitability,” they wrote in a report.
The brokerage estimates JLR’s Ebit margins at 0.8 per cent for FY21, 4.4 per cent for FY22, and 5.8 per cent for FY23E (versus -0.1 per cent in FY20). The analysts expect the company’s net debt to decline to Rs 29,600 crore by FY23 from Rs 482,00 crore in FY20. This is not factoring any monetisation in non-core assets, but factoring warrant conversion by the parent, resulting in the infusion of Rs 2,600 crore.