Tata Motors Ltd has a history of facing massive setbacks, only to rise stronger in the future. It finds itself in the midst of another perfect storm, with declining sales at its UK unit Jaguar Land Rover Ltd (JLR) resulting in a huge correction in its value. Tata Motors’ market value has plunged 62% in a year.

So will Tata Motors’ Project Charge and Accelerate plan at JLR to cut costs and improve cash flows by a total £2.5 billion over 18 months work? Will investments into new car models and electric vehicles pay off amid heightened competition from long-standing auto giants, and in the face of global auto gloom?

What’s worrisome for investors is that the crisis seems to be deepening on all fronts.

JLR’s latest performance was pitiful. December vehicle sales shifted into reverse gear, dropping 6% year-on-year. Cumulative sales in the April-December period are down 5%.

Worse, JLR sales fell 42% in China, amid a general gloom in the region. China’s auto sales for 2018 closed 2.8% lower than the previous year, making it the first reversal since the 1990s. The country, which comprises nearly 30% of the world’s auto market, has guided for flat volumes in 2019.

In addition, there are the Brexit-related worries, the shift away from diesel cars in Europe, plateauing sales in North America and the impact of China-US trade tariffs to be reckoned with. While these regions together comprise a third of JLR’s sales, China alone had a 24% share in the company’s sales, until a few quarters back.

But it is not just JLR that is in trouble. The global auto slowdown and the resultant production glut is turning more severe than expected. Sales of other luxury brands such as Audi, BMW, Mercedes-Benz are falling as well.

As such, JLR is not alone in its decision to shut down some production facilities and cut employee strength. Ford and General Motors too are taking similar steps. A report by Nomura Research portrays a dull calendar for 2019, with a 1.4% contraction expected in global auto demand.

In short, while cost-cutting might arrest losses, JLR’s plummeting sales graph may not change course before FY20. Nomura forecasts a 7% year-on-year drop in the company’s FY19 sales, which could turn positive in FY20 on a weak base and with new launches.

But hefty discounts offer dim hopes of a near-term improvement in cash flows. FY18’s free cash flows that were negative £1.05 billion, continued the trend in the first two quarters of FY19 at -£1.67 billion and -£624 million, respectively. Tata Motors’ management is hopeful of generating positive free cash flows through inventory liquidation and sales of new models. This should also pull back Ebit (earnings before interest and tax) margin into higher-single digits by FY20-21.

It is no mean task however. JLR’s Ebit slipped into losses in the September quarter from a profit in the year-ago period. This dragged Tata Motors into a consolidated loss of 1,000 crore, compared to a profit in the year-ago period. A turnaround depends on success of new launches and its electric or hybrid vehicles. True, the company has a strong brand in JLR, but competition is likely to be stiff in new-age vehicles, with leading brands also in the fray.

Meanwhile, the Indian business of trucks and passenger cars has been doing well, with rising sales and market share gains. That said, the last quarter saw a sudden dip in truck sales, leaving the Street a bit worried on that front as well.

Of course, in the final analysis, JLR accounts for over 90% of the auto giant’s profits, and its fortunes will drive the company’s valuations. As pointed above, while Tata Motors may be taking measures to cut costs and improve profitability, there is little it can do about the global slowdown. Little wonder then that its new restructuring initiative was not convincing enough for rating agencies to turn positive on the company.

Some analysts have forecast an increase in JLR’s profit margin due to revenue increase and favourable foreign exchange gains in the December quarter. But, this must not be mistaken for a turnaround in fortunes.

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