JLR’s debt burden is expected to ease due to lower capex, improving profitability, and regular debt repayment. JLR CEO Adrian Mardell said on Wednesday that the company was making strides towards its financial goals of achieving a net cash positive position by 2024-25 and double-digit EBIT by 2026. However, JP Morgan analysts warned that they will watch out for the management commentary regarding debt-reduction targets.

Since 2018, the Tata Motors Ltd (TML) management has undertaken several restructuring initiatives that are expected to improve operating efficiency, lower capex, and hasten FCF generation for JLR. JLR has also taken a number of initiatives to realign its portfolio to an electric future, ensuring sustainability and viability of its business model. A new growth cycle is expected to play out for JLR, with chip availability easing, China opening up, favourable tailwinds emerging from the Inflation Reduction Act (IRA) in the US, competing subsidies announced by the EU, and a peaking of the interest rate cycle.

TML acquired JLR for a total consideration of £2.3 billion in 2008, a recession year when the luxury car market was at a low. TML infused £1 billion to manage liquidity through the crisis, cut costs via restructuring of operating expenses, and invested in new products. This was JLR’s strategy between 2010 and 2015, when JLR’s wholesale volume grew at a CAGR of 19.2%. However, between 2015 and 2020, JLR’s revenue from operations grew at 1% CAGR, and its profitability and balance sheet deteriorated. Net debt increased from negative £1,726 million in FY15 to positive £1,679 million in FY20.

FY20 to FY22 was hit by the pandemic, and JLR’s sales volumes and revenues both declined. The decline in capacity utilization increased the overhead costs and impacted profitability
However, JLR’s recent strategic shift towards electric vehicles and cost optimization is expected to boost revenue growth and improve profitability.

Analysts at Jefferies have noted that Tata Motors, JLR’s parent company, is targeting net-zero emissions by 2039 for JLR, by 2040 for Indian passenger vehicles, and by 2045 for Indian commercial vehicles. JLR has also announced plans to have all Jaguar and Land Rover nameplates available in pure electric form by the end of the decade, with the first all-electric Land Rover model expected in 2024.

Despite the positive outlook, JLR’s massive investment plan to achieve its electric roadmap raises concerns about the company’s financial position. JLR CEO Adrian Mardell has stated that the company aims to achieve a net cash positive position by 2024-25 and double-digit EBIT by 2026. Analysts at Ventura Securities believe that JLR’s volumes will grow at a CAGR of 7% to 455,517 vehicles, while its revenue and EBITDA are expected to grow at a CAGR of 13.2% to 30,070 million pounds and 30.2% to 4515 million pounds by FY26 estimated.

However, JP Morgan analysts have warned that JLR’s debt burden may not ease as quickly as expected, and they will closely watch for management commentary regarding debt-reduction targets. They estimate that JLR’s volumes will need to ramp up to 100,000 per quarter in FY24 to generate free cash flow of over 1 billion pounds and resume its de-leveraging journey. They expect net debt to decline in FY24, but Tata Motors’ zero net debt targets could get pushed beyond FY25.

To manage its debt burden, JLR has been working on a business plan since FY19 to generate positive, free cash flow at lower volumes, significantly reducing the break-even volumes from 660,000 vehicles in FY19 to 330,000 vehicles in FY22. Ventura Securities noted that the management is targeting to maintain break-even volumes in the range of 300,000 to 350,000 vehicles. JLR has also reduced the architectural platforms from six to three using modular vehicle platforms, significantly reducing operating expenses and improving EBITDA performance in the past couple of years.