Mumbai: Global ratings agency Fitch Ratings Ltd late on Thursday revised its outlook on British automaker Jaguar Land Rover (JLR) Automotive Plc from ‘stable’ to ‘negative’.

The revision, which adds to the woes of the Tata Motors Ltd-owned luxury carmaker, reflects Fitch’s projections of a further fall in JLR’s free cash flow (FCF) over the next two years, wrote Emmanuel Bulle, senior director at the American ratings agency, in a 13 September note.

The long-term credit rating remained ‘BB+’, which is a non-investment grade rating, Bulle said.

JLR’s free cash flow fell significantly during FY18 to negative £1 billion (about 4.2% of sales), with Bulle expecting this metric to fall further to about -6% by the end of the current fiscal.

Bulle expects JLR’s free cash flow to enter positive territory from the end of FY21, but pointed to heavy investments, falling profitability, “material" Brexit risks and limited scale and product diversity as factors influencing JLR’s credit ratings and outlook.

JLR has, since the past fiscal, been facing a range of issues from market cyclicality and muted near-term demand in the US, to uncertainties in the UK and Europe over Brexit and taxation on diesel cars, which make up about 90% of JLR’s Europe sales.

Further, demand in China, JLR’s largest market, has dampened in the past month over fears of a trade war with the US.

Fitch Ratings is the only large global ratings agency to have a negative outlook on the UK’s largest automaker, with Moody’s Investors Service and Standard and Poor’s having a ‘stable’ outlook, according to Bloomberg data.

Fitch has assigned JLR a negative outlook for the first time, since it began rating the maker of the Range Rover and E-Pace models in May 2011.

However, its long-term credit rating has moved a rung up to BB+ from BB- during the period.

“Higher production and labour costs burdened JLR’s profitability but margins were particularly impacted by rising depreciation costs from recent investments," Bulle said.

Depreciation would continue to weigh on profitability but would be partly offset in the medium term, led by improvements in productivity and savings in the manufacturing process, he said.

JLR reported its worst Ebitda (earnings before interest, taxes, depreciation and amortisation) margins at 12.2% in the quarter ended March, only to fall further to 6.2% during the three months ended June.

Further, JLR is set to spend at least £4.5 billion (around 40,520 crore), or about 15% of its FY19 revenue, in capital expenditure (capex) over three years, starting this fiscal. This would be the highest cumulative capex figure for the maker of the Range Rover and F-PACE SUVs. JLR has targeted a capex level of 12-13% of annual turnover in the years ahead.

Fitch expects these investments to improve JLR’s manufacturing footprint outside the UK, widen a “limited" product portfolio, and enhance the automaker’s ability to respond to ever-changing sector dynamics.

However, with about 20% of sales coming from Europe and the US, JLR is exposed to the twin risks of an unfavourable Brexit and increased global tariffs. JLR chief executive Ralf Speth said earlier this week that a “bad" Brexit could put “tens of thousands" of jobs at risk and cost the company “more than £1.2 billion a year" since JLR’s supply chain would be disrupted and free access to Europe’s single market curtailed.

JLR has four plants in the UK that produce 3,000 cars a day, use 25 million components and are dependent on a ‘just in time’ model of manufacturing. Any delays would cost the company £60 million a day, according to Speth.

While Fitch believes new assembly plants in Slovakia and Brazil, and a manufacturing agreement with Austrian auto maker Magna Steyr would “somewhat" ease JLR’s production issues in the medium term, the automaker remains “heavily" at risk in the short-term.

Fitch has estimated that JLR’s FY19 revenue would fall by about 5%, primarily led by deterioration in the product mix, before recovering to a mid to high-single digit growth through to FY22.