Jaguar Land Rover faces forex headwinds

If currency remains largely at present levels and with two to three new initiatives rolling out, JLR is expecting an impact on margins

Despite a superior product mix Tata Motors-owned Jaguar Land Rover lost on the margins front last quarter-driven down by forex losses from a weak British pound.

The two brands whose more than 80 per cent of production is sold outside the UK, is heavily exposed to currency fluctuations. About £138 million (Rs 1,300 crore) was eaten away by adverse exchange nutrition during the quarter ended December 31, 2014.

In a recent conference call with analysts Mumbai-based Tata Motors management has indicated continued pressure on margins with regards to JLR. If currency remains largely at present levels and with two to three new initiatives rolling out, the company is expecting impact on margins.

C Ramakrishnan, chief financial officer, Tata Motors said, “I think there'll be two, three impacts. One is the start and ramp up in China. The start up and the ramp up of the engine production and the launch of new cars in 2015. We expect there will be an offset in terms of overall growth in volumes and the strength of demand of the new products in terms of pricing and demand pool. It's difficult to give a range, but in general, I thought it's only fact to say that these impacts will happen in 2015 and 2016 and we should be prepared for that.”

A new cheaper Jaguar will be launched in the April-June quarter. Analyst fear that this new Jaguar XE small sedan will have the lowest price points and thinnest margins of any Jaguar Land Rover product.

“It’s therefore highly currency sensitive – any product with such low gross margins will find that exchange rates make or break it”, noted an analysis by US-based Barrons.

Further the Russian ruble, which has depreciated almost 40 per cent against the pound, ever since sanctions were imposed on the west European country. About a quarter (about 20000 a year) of JLR’s ‘rest of the world’ sales comes from Russia.

The dollar and Renminbi have rallied, the Euro has fallen against the British pound. JLR buys Euro-dominated purchases of engines from Ford Motor Company and gearboxes from ZF. Moving forward JLR will become increasingly independent for engines when it starts manufacturing engines from a new plant in the UK.

“The company has a hedge book of £13-15 billion, in our view, and expects currency to have a negative impact in the coming quarters due to the recent depreciation of the pound versus the dollar. The company has a policy of booking three-year forward revenues”, stated a note from Kotak Institutional Equities.