Shares in the company that owns Jaguar Land Rover (JLR) fell sharply this week after it warned investors that profits for the current year will be lower than expected. India-based Tata Motors blamed low margins on its Halewood-made Range Rover Evoque.
With an average selling price of around £30,000, the recently-launched Evoque is cheaper than the company’s traditional luxury models, some of which carry a price tag in excess of £100,000. However, with sales of the Evoque booming to 118,000 a year, this cheaper and less profitable model now accounts for a higher proportion of the company’s total sales mix.
Tata also blamed fluctuating international currencies for this week’s profits warning, issued to the Bombay Stock Exchange in Mumbai where the car firm is quoted.
A weaker dollar has meant that Tata Motors makes less profit from vehicle sales in the important United States market. At the same time, a stronger euro has increased the costs of some components.
Shares in the company initially fell by as much as 10% on the news. JLR accounted for 75% of Tata Motor’s operating income last year.
Stockbroker BNP Paribas cut its rating on Tata Motors in response to the announcement.
Vijay Somaiya, head of treasury and investor relations at Tata Motors, told investors: “We had indicated at the beginning of the year that product mix would be poorer because of higher sales of the XF, Freelander and Evoque.
“Incentives in the current year are also slightly higher than previous years.”
Umesh Karne, an analyst with BRICS Securities in Mumbai told a financial newswire: “The company saying that margins will be lower is a big concern.
“The indication that capital expenditure will be higher as well as about negative cash flow is a concern, as we factored positive cash flows into the share price.”
Tata Motors’ cash position is set to deteriorate over the next year as it undertakes £2.75bn of capital investment to construct a new factory in China and an engine plant in Britain as well as develop new Jaguar and Range Rover models.
The car maker, which has £2.18bn in cash, said it may raise additional funds for investments from capital markets and through bank loans.
It is hoped JLR’s annual sales will reach 500,000 on the back of this planned investment. This compares to current sales of 360,000.
However, it remains overshadowed by the 1.5m sales by rival BMW.