Will JLR Maintain Profitability As Electrification Hurdle Looms?

Luxury vehicle maker JLR reported impressive numbers in its latest financial report after a few rocky years and some experts reckon sunlit uplands beckon. Some, but not all.

Plans for the Jaguar brand are questioned, looming electrification will pose hurdles, while the lack of a Defender pick-up truck in the U.S. was said to be a missed opportunity. But there is optimism at least for JLR’s short-term prospects.

Debt rating agency Moody’s Investors Service raised JLR’s category to positive from stable.

British automotive analyst Dr Charles Tennant, long a harsh critic of JLR’s financial performance, likes the turnaround plan.

“Things are looking up for JLR right now after two successful quarters of stellar growth and profits as they forge on with their “Reimagine – Luxury by Design” – strategy,” Tennant said in an interview.

JLR has said sales were led by of 3 of its most profitable SUVs, the Range Rover, Range Rover Sport and Land Rover Defender.

Despite two-quarters of profits, the Tata Motors of India-owned JLR, which recently shortened its handle from Jaguar Land Rover, reported a pretax loss of £64 million ($80 million) for the year ended March 31. Revenues jumped 24% to £22.8 million ($28.6 million). Vehicle sales slipped to 354,000 vehicles from 376,000 the year before. Sales will hit 400,000 in the current financial year, JLR said.

Like many upmarket automakers, JLR boosted profits during the chip supply crisis by selling fewer cheaper vehicles and concentrating on the highest profit margin ones.

Investment bank UBS said that after a “deep dive” into the global premium vehicle market it found investors underestimate JLR’s vulnerability to rapid electrification. UBS said JLR’s robust earnings were driven by unsustainable high prices and near-zero discounts.

UBS said in a report, disruption caused by electrification among China’s premium brands was likely to be repeated in other regions.

“We foresee this eroding JLR’s margins to about 4% in fiscal years 2025 and 2026 versus guidance for double-digit EBIT (earnings before interest and tax) margins in the medium term. Also, the strategy to put Jaguar center stage with 3 new EV models warrants some caution, in our view, given the lack-lustre attempts to revive Jaguar in the past,” the report said.

Moody’s said JLR’s immediate outlook is strong, with a very high order book of around 200,000 mainly Range Rovers, Range Rover Sports and Defenders. Revenues should hit £30 billion ($38 billion) in the current financial year with profitability improving to an EBITDA (earnings before interest, tax, depreciation and amortization) towards 5%.

But Moody’s also sees problems looming from electrification and the Jaguar relaunch.

“By the end of 2026, JLR plans to have launched six battery electric vehicles with Land Rover and relaunched Jaguar as a purely electric brand. Moody’s considers the launch of this large number of new models and electric variants combined with the necessary investment in JLR’s production facilities within a relatively short period as a meaningful challenge with the potential for disruption to its operations. Furthermore, there is uncertainty around the success of the reinvented Jaguar brand, particularly with regards to consumers’ acceptance of the completely new models at a significantly higher price,” Moody’s said in a statement.

Professor Ferdinand Dudenhoeffer, director of Germany’s Center for Automotive Research, and a consistent critic of JLR, has said it lacked the scale to compete with the likes of BMW, Mercedes and the Chinese manufacturers BYD and Geely.

“The new brand strategy (with sub-brands Range Rover, Discovery, Defender, Jaguar) is nothing less than copying Mercedes Strategy, but without the foundation and volumes of Mercedes. So, I guess for Tata, it could be interesting to find a joint venture partner or sell it as a whole. Tata is not premium and therefore these are not synergies or scale effects,” Dudenhoeffer said.

“Sorry to say, I think the UBS proposal to sell shares now is the best strategy for investors and shareholders,” he said.

Analyst Tennant says Tata, with its revenues of $128 billion, has plenty of scale to back JLR’s needs. He points out that the declared aim to move Jaguar upmarket and make profits from higher prices has been achieved in de facto fashion by the rest of JLR as it accelerated profits by raising prices and using its brand power to avoid discounts.

Tennant lauded JLR’s success in halving its breakeven point to 300,000 while doubling the average vehicle price to £72,000 ($90,300).

“Pre-tax profits for the last two quarters were £265 million ($330 million) and £368 million ($460 million) respectively delivering a debt busting free cash flow of £521 million ($650 million) for the full year, from negative cash flow of £1.2 billion ($1.5 billion) the year before – net debt is now down to £3.0 billion ($3.8 billion), and the company has a cash and credit liquidity of £5.3 billion ($6.7 billion),” Tennant said.

“EBIT (earnings before interest and tax) margins were 2.4% for the full year but the quarter four EBIT was 6.5% which is a good baseline for next year on route to double-digit EBIT by 2025. Now JLR are not chasing BMW, Audi, or Mercedes Benz market share or volumes they can carve their own highly profitable niche areas of market white space with highly distinctive and desirable vehicles,” Tennant said.

Tennant says JLR has a bright future.

“JLR are back in profit, have a long-term viable business strategy and product plan which is well funded and has a reliable collaboration with Tata Group companies, so I think a sustainable and profitable future is now on the cards,” Tennant said.

Professor David Bailey of Birmingham Business School said JLR’s recent performance showed it wanted to move everything upmarket into higher-price, but not necessarily higher sales territory.

“They never managed to execute the one million sales a year target, and the lack of scale means they have to charge premium prices. The strategy of moving upmarket makes a lot of sense, although there really is no alternative. To make that work it needs to solve the Achilles heel of reliability. With Tesla, BYD and Geely entering the premium sector, they are retreating to the upper echelons with their distinctive brand,” Bailey said.

Bailey wasn’t convinced of Jaguar’s viability. Perhaps there were plans to float it off, following the example of Ferrari and Porsche.

“One thing has always puzzled me. Why on earth is there no Defender pick-up truck. It would sell in big numbers in North America and carry a substantial price premium,” Bailey said.

JLR was asked to react to this story.