JLR told the UK investor fraternity last week that it will invest a minimum of $5.95 billion annually over the next three years.
In the last financial year, Jaguar Land Rover (JLR) had invested $5.5 billion, over half of which was in new vehicles and technologies and the rest in new and upgraded manufacturing and R&D facilities.
In a statement after declaring the results for the year ended March 31, JLR’s CEO Ralf Speth, had said “As we mark the first 10 years of Tata ownership, our focus is on shaping our future and we will continue with over-proportional investment in new vehicles, manufacturing capabilities and next-generation automotive technologies.” But nobody could have guessed that “over-proportional” meant a whopping $17.8 billion over the next three years.
The funds, the daily added, will go into an unprecedented, 99-product programme that will include annual updates, new-generation cars, vehicles on the electric power-train, and four new brands that include the I-Pace and the new Defender. Two more EVs could also be on the cards. In fact, 51 per cent of the total capex will be on products. With trade war and Brexit challenges looming large, JLR is increasing its focus on products than on capacity addition.
But it’s not a new strategy for the company. Between FY11 and FY18, JLR has spent $26.47 billion at the current exchange rate, on capex. During that period, sales increased 15 per cent annually.
To fund its ambitious three-year plan, JLR is banking on internal accruals and debt. In its Q4 results the company had said that in the last fiscal it had $6.15 billion of cash and $2.51 billion undrawn RCF. The daily added that JLR’s capital expenditure to sales ratio stood at 16.2 per cent in FY18, which, as per analysts’ estimates of JLR investments in the next three years, will likely move from 16.2 per cent to 14.8 per cent and 13.6 per cent during the period in question.
The lower guidance on capex to sales ratio in the long-term is likely to be viewed positively by the Street as it would help support sustainable free cash flow. JLR’s rivals already fare better on this score. For instance, in 2017, BMW’s capital expenditure to sales ratio stood at 11 per cent and Daimler’s at 12.1 per cent.
In the medium term, JLR expects the share of battery electric vehicles (BEV) and plug-in hybrid electric vehicles (PHEV) in total sales to rise to 20 per cent, while that of diesel and petrol vehicles will drop to 30 per cent and 50 per cent, respectively. So it is reportedly consolidating vehicle architectures from six to three, and transitioning to a modular vehicle platform with electrification as a critical element. This will bring in economies of scale and reduced costs. Also on the cards is a new premium transverse architecture for small SUVs, modular longitudinal architecture for EVs, and even modular engine architecture that will prepare the company for future regulatory challenges.
Worryingly, JLR’s ambitious investment plan comes at a time when it is taking a hit on the sales side from cyclically weaker markets in the UK, exacerbated by Brexit, and in the US. The markets also remain challenging because of diesel uncertainty in the UK and Europe, as the company pointed out in its Q4 results presentation.
The daily, therefore, sees its free cash flow – or the money available for distribution from profit after deducting capital expenditure -remaining negative in the near term with the stated investment plan of $5.95 billion in this year. JLR already had negative cash flow of $1.37 billion in FY18.
The company, however, expects higher sales growth with improved profitability in FY19. JLR reportedly told investors that IHS Markit predicts the global luxury car market to grow from 6.6 million to 7.7 million units in the coming six years. The three-year investment game plan focussing on new products might help it ride ahead of its rivals.
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