JLR: sales up, profits down.
Jaguar Land Rover has just unveiled record sales for January 2013. The firm sold just short of 35,000 cars in the first month of 2013, up by almost a third against the same time last year. January sales were up by 74% in China, 46% in Asia Pacific, 33% in the UK, 24% in North America and even by 10% in a depressed Europe.
What's encouraging is that both brands did well, whereas previously the big sales increases were largely chalked up by Land Rover and Range Rover models.
In January, Land Rover sold 29,118 vehicles (up 31%), with sales up in all major markets. Meanwhile Jaguar sold 5,759 vehicles (up by 40%), with increased sales of the XJ (up 70%) and the XF (up 37%), reflecting strong sales of the recently introduced XF Sportbrake, as well as all-wheel drive models and more fuel efficient engines.
But despite this sales success, last month Tata warned that JLR profits for the current year would be less than expected, even if the firm is still on track for a record year.
Not surprisingly, while JLR's pre-tax profits for the nine months to December 31 were up 20% to £1.2bn, the firm reported a 21% fall in third quarter (Oct-Dec 2012) profits as a result of falling margins and rising investment. And JLR's heavy investment in R&D, new models and international expansion ate in the firm's cash pile. The firm is investing around £2bn in products and facilities in the year to March, increasing further in 2013/14.
As a result, free cash flow at JLR became negative - just a few months after paying its parent Tata its first dividend - and this negative cash flow is likely to continue into the next financial year (2013/14). The firm raised over £300m in new debt last month and has stated that it will raise funds to finance investment as and when needed. The firm had net cash of £437m at the end of September. All in all, this is turn raises the possibility of more borrowing.
Overall, JLR's pre-tax profits for the three months to 31 December fell from £509m to £404m. So although sales rose 14% to around 89,000 units, fuelled especially by ongoing demand growth in emerging markets such as China, the lower-margin Evoque and Freelander cars accounted for over 50% of all Land Rover retail sales in the quarter, up from 44% a year earlier.
This increasing reliance on lower-margin models, as well as adverse currency movements, saw JLR's profit margin fall. A weaker US dollar means that Tata Motors makes less profit from JLR sales in the key US market. Simultaneously, a stronger euro has increased the costs of imported components.
(It should be noted that the firm recently started selling its new Range Rover model and is set to launch the F-Type Jag later this year. Both models should improve margins at the firm).
JLR's recent sales success had been easing the pressure on its parent Tata Motors. Tata's January sales in India fell by 30% to 62,000 units. And car sales in India are projected to have their worst year for a decade or so, thanks to slower economic growth, higher fuel prices and increased interest rates. Car sales have now been falling in India for three months and sales of medium and heavy trucks (a core market for Tata Motors) are down heavily.
So JLR's recent good health has been offsetting some of Tata's home weakness. Last year, JLR turned in its best-ever sales performance, selling over 350,000 cars globally, up 30% on 2011, with China becoming its biggest market.
But JLR's declining profitability has now caught up with its parent. Tata Motor's net third-quarter profit came in well below analysts' expectation (which were around 29bn rupees or £345m) at 16.28bn rupees (£194m). This was down by around 50% year-on-year and represented the first profit fall since quarter 2 of 2011/12. Much of the fall in Tata Motor's profits was due to the decline in JLR profitability (down from 17% in the same period a year earlier to 14% in the last quarter).
These JLR profit margins are still impressive by industry standards but underline the point that the firm won't be generating Tata big amounts of cash in the near future.
Model mix and currency shifts aside, this is actually a good thing as in large part as it reflects Tata's willingness to enable JLR to think long-term and make substantial investment in new models and R&D.
That long-term commitment is hard to come by given the short-termist nature of the UK's financial system and actually underlines the benefits of Tata ownership.
Professor David Bailey works at Coventry University Business School.