Tata Motors Ltd’s consolidated revenue increased 18% in the March quarter (Q4). Revenue of the standalone entity, consisting largely of its India business, jumped 45%, making a meaningful contribution to overall growth. Excluding the translation gains (revenue conversion from the UK pound to the Indian rupee—the pound appreciated against the rupee last quarter), revenue growth will stand at around 12%, which is decent.

But this double-digit revenue growth did not count for much. Profitability at the consolidated entity softened as expenses grew at a faster pace. As a consequence, Q4 profit of Tata Motors almost halved from the year-ago quarter.

The drop in earnings is largely due to the weak show at the company’s UK Jaguar Land Rover (JLR) unit which generates most of Tata Motors’ revenue and profit. Profit before tax at the division slumped 46% due to a sharp rise in depreciation and amortization expenses. The quarter has seen a development expense charge to the tune of £97 million. But even adjusted for this, the operating margin at JLR has seen a noticeable reduction from the year- ago quarter.

The expenses would not have looked this high had JLR been doing well on the sales front. But the scenario here remains dull. Retail sales at the division are down 3.8% during the quarter. The demand environment remains challenging. Except India and China, none of the key markets—the UK, Europe and the US—are looking up for JLR.

Sales in the UK and Europe have been hit by the Brexit transition and increasing regulations on diesel cars, while the US is seeing a cyclical slowdown in volume. To counter the regulatory headwinds and changing consumer preferences, such as the shift to electric vehicles and new-age cars, JLR has stepped up investments. It has invested £4.2 billion in the previous fiscal year and plans to invest an additional £4.5 billion in the current fiscal year, developing new models and technologies.

The product portfolio is expected to begin reflecting the investments from 2019. By 2020, the management expects the company to have a fairly relevant portfolio in terms of electric vehicles and other offerings. But while these investments are the need of the hour, it will also induce near-term pain.

High investments at JLR are leading to negative free cash flows and have driven up debt levels. With raw material costs on an upswing, the fear is that high capex will weigh on JLR, thereby affecting the consolidated entity’s profitability in the near term. The management plans to focus on the premium part of the business and extract better cost efficiencies. But much depends on sales momentum at JLR. To be sure, the management expects better sales at the division in FY19. But improvement in profitability at the unit can be rather gradual, with noticeable gains expected to be seen only after FY19.

The Tata Motors’ stock is reflecting some of these concerns. Compared to a 13% rise in the Sensex, the stock lost 31% over the last year as the slowdown at JLR became more visible. But with the March quarter results showing no let-up in pressure on profitability and the company projecting a rather gradual recovery in margins, the outlook continues to look dim.

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