BackTata Motors June quarter update indicates benign liquidity position at JLR
If the current pace of recovery in sales sustains, then the existing liquidity can help JLR see this fiscal through without fresh capital infusion
PremiumMUMBAI: For Tata Motors Ltd, reducing costs, curtailing investments, and conserving cash were among the ways to withstand the covid-19 disruption.
The update for the June quarter indicates early benefits of these efforts. The UK-based Jaguar Land Rover (JLR), a major driver of earnings for Tata Motors, ended the quarter (Q1 FY21) with decent cash of about £2.7 billion.
"The quarter (ended) with a stronger than expected cash position of about £2.7 billion (unaudited) and overall liquidity of about £4.6 billion including the company’s £1.9 billion revolving credit facility, which remains undrawn," the company said in a statement.
JLR had ended the March quarter (Q4 FY20) also with enough liquidity, including £3.7 billion in cash and a £1.9 billion undrawn revolving credit facility. If the current pace of recovery in sales sustains, then the existing liquidity can help JLR see this fiscal through without fresh capital infusion, according to an analyst at a domestic broking firm.
As countries across the world ease lockdown restrictions, vehicle sales have begun to recover. The 25% year-on-year fall in sales in June was lower than the 42% drop for the entire Q1 FY21. "Post the resumption of operations, the Range Rover Sport, the new Range Rover Evoque, and the Land Rover Discovery Sport emerged as the bestselling vehicles. Customer response to the new Land Rover Defender has been overwhelmingly positive, and as retailers have come back on line, there has been a surge of interest in the Land Rover," said analysts at Motilal Oswal Financial Services Ltd.
Even so, as the analyst cited above warns one has to see how much of the recovery in sales is sustainable or are driven by pent-up demand.
To recap, the sharp fall in sales hit JLR’s revenue and cash flows. The pressure on operating earnings made the consolidated entity’s ₹48,000 crore debt look unwieldy. While the June quarter update indicates liquidity situation is not worrisome, the pressure on earnings will continue in the near term. This is underscored in Moody’s Investor Service downgrade of Tata Motors ratings last month.
“(Moody's) expects a large cash outflow during the March-June quarter with some recovery thereafter as working capital normalizes. Accordingly, free cash flow after interest and capital expenditures will turn visibly negative again for at least fiscal 2021. Deleveraging and the ability to generate sustained positive free cash flow in fiscal 2022 and thereafter will significantly depend on the company's ability to improve profit margin while maintaining investment discipline," the rating agency had said in a 17 June ratings update on JLR.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
