Fitch Upgrades Jaguar Land Rover's Outlook to Positive

Fitch has upgraded its outlook on Jaguar Land Rover to positive from stable, citing strong operational performance and robust financial profile. The agency has assigned JLR a rating of "BB-".

"The change in the outlook reflects JLR's continued strong operational performance and our expectation that the company will maintain its robust financial profile, despite a period of heavy investment in its transition to become a higher volume premium manufacturer," Fitch said.

The positive outlook indicates that an upgrade in the rating could occur over the next 24 months if JLR continues to maintain its profitability, generate positive free cash flow (FCF) and increase its breadth and volume of products.

The successful execution of the Jaguar XE compact sedan model is seen as a key part of this.

Fitch expects JLR's sales and profitability to continue to be robust in the financial year ending 31 March 2015 (FY15) and FY16, supported by a strong product pipeline and healthy global demand for premium vehicles.

"We expect JLR to maintain margins above 8% in FY15-16 despite increased costs associated with elevated capex and heightened competition."

Retail volumes in FY14 rose 16% from the previous year on strong sales of the Range Rover Evoque, New Range Rover Sport and the Jaguar XJ, XF and F-Type, and a richer product and geographical mix contributed to the increase in the EBIT margin to 11.7% from 10.8% in FY13.

The improvements continued into the first quarter of this fiscal year, with retail volumes increasing by 22% from a year earlier and EBIT margins rising to 15.9%, albeit slightly boosted by a positive currency effect, from 10.9% in 1QFY14, leading to the upward revision.

At the same time, limited scale and product diversity continue to constrain JLR's business profile as these factors raise the risk of volatility in earnings and cash flow, Fitch said.

"However, we recognise that JLR's current heavy investments, if successfully executed, will increase its product breadth and volume over the medium term."

Capacity expansion

Fitch said it expects JLR's investments in capacity expansion, engine manufacturing, vehicle architecture and new technologies to meet carbon dioxide emission requirements will contribute to negative FCF in FY15-16, despite strong cash flows from operations.

The rating agency also expects JLR to maintain a strong financial profile and robust liquidity buffer in FY15-16, despite elevated capex.

Another positive of JLR highlighted by Fitch is its geographical mix as far as the market is concerned. Over 45% of its sales by volume now go to the developing markets and 55% to mature markets.

"JLR has maintained healthy margins and increased market share in China, despite intensified competition, and is the fourth-largest automaker in the premium segment by sales volume, after Audi, BMW and Mercedes.

"While the premium segment will continue to outperform the volume market over the medium term, we expect increased competition within certain regions and premium sub-segments."