OPPORTUNITIES:
The new Government at the centre has expressed a mandate of infrastructure oriented spending for national development. The resultant fiscal spending will give a boost to transport & mining sectors. Lifting of mining bans is also expected to ramp up through the year. Demand for trucks, tippers as well as last mile transport solutions will go up as economic activity revives. The changes are however expected towards the later part of the financial year, given the time taken to form and execute policies.
FDI is also likely to be opened up, albeit cautiously, including in sectors like Defence. The Company is focusing on increasing their offerings in defence sector from providing only pure logistics solutions to tactical and combat solutions. This provides the opportunity for capturing a larger share in a growing market.
Growing wealth in rural markets in India also provides an added opportunity to expand sales reach and volumes. The sales reported out of areas earlier considered rural is growing year on year. The overall gap of automobile purchase between rural and urban areas is narrowing in India. The Company is focusing on reaching rural target market to address the latent need, in cost effective ways
With increasing awareness and education of the Indian customer, a range of non-vehicular products and services like spares, after sales, annual maintenance contracts etc are also gaining popularity in demand. The Company is poised to address this growing need, thereby providing additional sources of revenue, which are noncyclical in nature, to hedge for otherwise cyclical demand in the auto industry.
The growing demands and sensibilities of customers in the ILCV segment is also something Tata Motors is poised to address with its new range of vehicles. The evolving infrastructure in India will change the way transportation industry matures, with demand for better quality and more comfortable vehicles. The company has already invested in new platforms to cater to such evolving demands.
India has emerged as a major hub for global manufacturing with its advantage of lower input costs, availability of local supplier base and high domestic demand. As an established domestic manufacturer, the Company is ideally placed to take advantage for targeting lucrative international markets, either through the fully built export or CKD route.
In addition to the above, the Company also has the advantage of a strong in-house design and development facility and professionals. Thus the Company's R&D group is capable of developing solutions for different regulatory and emission norms as per market specifications in minimal time.
The Company is focusing on increasing its global presence, as an effective hedge against domestic downturn as well as a growth opportunity. While the company is already present in Africa and some parts of ASEAN, it is focusing on increasing presence in more key markets in ASEAN and LATAM. The Company is also actively considering expanding its global manufacturing footprint in key international markets to take advantage of import duty differentials and local sourcing benefits.
Jaguar Land Rover Opportunities through products and markets: JLR offers products in the premium performance car and all-terrain vehicle segments, and intends to grow the business by diversifying the product range within these segments. For instance, the Range Rover Evoque defined the market segment for smaller, lighter and more"urban" off road vehicles, complementing the more mature Range Rover, Freelander and Discovery markets. Similarly for Jaguar, the 2.2L Diesel XF caters well for a wide customer base, notably including the corporate market segment, and theXF Sportbrake adds a premium estate model to the portfolio, and of course the Jaguar F TYPE, available in both soft top and now coupé, provides a vivid representation of the confidence and ambition of thebrand. As well as the core product family, various options, such as long wheel base, smaller engine and all-wheel drive derivatives, help to strengthen overall product offering.
JLR also has ambitious but robust plans to continue to develop the product range. Including the Jaguar XE, the eagerly anticipated midsized sedan, and Jaguar crossover based on the C X17 concept and for Land Rover, the announcement of the Discovery Sport, available for sale in 2015 andto be the first in a new family of Discovery's. As well as hybrid and long wheel base derivatives of existing models
Complementing the new products, JLR intends to also expand its global footprint, particularly into those emerging, affluent countries with growing sales potential and appetite for the Company's distinctive, premium products. There are three specific aspects to JLR's strategy of geographic expansion:
- Increase marketing and dealernetwork in emerging markets. For example, in China, JLR established an NSC in 2010 to expand our presence in this key market and have increased network of sales dealerships to 170 dealerships as at March 31, 2014. Similarly, JLR expect to continue to grow its presence in the Indian market by opening additional dealerships across the country.
- Establish new manufacturing facilities, assembly points and suppliers in selected markets. This includes a manufacturing and assembly joint venture in China with Chery Automobile Company Ltd.; an assembly facility in India operated by Tata Motors; and amanufacturing facility in Brazil. JLR also continues to explore further broadening our manufacturing base, including opportunities in Saudi Arabia.
- Leverage relationship with Tata Motors and the synergies we can achieve in the areas of research and product development, supply sourcing, manufacturing and assembly and other operations.
RISKS:
Deterioration in global economic conditions: The automotive industry, and the demand for automobiles, is influenced by general economic conditions, including among other things, rates of economic growth, availability of credit, disposable income of consumers, interest rates, environmental and tax policies, safety regulations, freight rates and fuel and commodity prices. Negative trends in any of these factors impacting the regions where the Company operates could materially and adversely affect our business, results of operations and financial condition.
The Indian automotive industry is affected materially by the general economic conditions in India and around the world. Muted industrial growth in India during FY 2013-14 along with continuing higher inflation and interest rates continue to pose risks to overall growth in this market. The automotive industry in general is cyclical and economic slowdowns in the recent past have affected the manufacturing sector including the automotive and related industries in India. Persistence of negative economic trends or further deterioration in key economic factors such as growth rate, interest rates and inflation as well as reduced availability of financing for vehicles at competitive rates could materially and adversely affect the Company automotive sales in India and results of operations.
Jaguar Land Rover business has significant operations in the United Kingdom, North America, continental Europe and China, as well as sales operations in many major countries across the globe. The global economic downturn significantly impacted the global automotive markets, particularly in the United States and Europe, including the United Kingdom, where Jaguar Land Rover operations have significant sales exposure. During Fiscal 2014, the automotive market in the United Kingdom and Europe continued to experience challenges. Confidence in financial markets and general consumer confidence have been further eroded by recent political tensions in North Africa, the Middle East and Ukraine, and concerns of an economic slowdown in China. Strategy with respect to Jaguar Land Rover operations, which includes new product launches and expansion in growing markets such as China, India, Russia and Brazil, may not be sufficient to mitigate the decrease in demand for our products in established markets and this could have a significant adverse impact on our financial performance. If industry demand softens because of lower or negative economic growth in key markets, including China, or other factors, results of operations and financial condition could be materially and adversely affected.
Economic outlook in India: The Indian automotive industry is affected substantially by the general economic conditions in India and around the world. The demand for automobiles in the Indian market is influenced by factors including the growth rate of the Indian economy, easy availability of credit, and increase in disposable income among Indian consumers, interest rates, freight rates and fuel prices. Demand for automobiles, particularly passenger vehicles and commercial vehicles were adversely impacted during FY 2013-14 due to lower GDP growth, high interest rates and high fuel prices. During FY 2013-14, RBI increased the key policy rates by 75 basis points to control inflation. Interest rates remained firm thus making it difficult to purchase consumer durable items on finance. High costs of borrowing and elevated consumer price inflation adversely affected household consumer sentiment and spending. On the other hand, slowdown in GDP growth has been due to decline in both consumption and investment growth. Investments were stalled because of high interest rates, poor demand conditions, and regulatory issues. While mining output declined on a year- on-year basis owing to policy, clearance and legal obstructions, the decline in capital goods production was due to a downturn in the investment cycle. Consumer durables sector performance was affected adversely by low income growth, elevated interest rates, and subdued consumer sentiment. From 4.8% of GDP in FY 2012-13, current account deficit during the first three quarters of FY 2013-14 (April-December) remained around 2.3% of GDP. This has led tohardening of rupee and fuel prices remained firm. The automotive industry in general is cyclical and economic slowdowns in the past have affected the manufacturing sector including the automotive and related industries.
Input Costs / Supplies: Prices of commodity items used in manufacturing automobiles, including steel, aluminium, copper, zinc, rubber, platinum, palladium and rhodium have become increasingly volatile in recent years. Further price movements would closely depend on the evolving economic scenarios across the globe. While the Company continues to pursue cost reduction initiatives, an increase in price of input materials could severely impact the Company's profitability to the extent such increase cannot be absorbed by the market through price increases and / or could have a negative impact on the demand. In addition, because of intense price competition high level of fixed costs, the Company may not be able to adequately address changes in commodity prices even if they are foreseeable. Increases in fuel costs also pose a significant challenge to automobile manufacturers worldwide including the Company, especially in the commercial and premium vehicle segments where increased fuel prices have an impact on demand.
Restrictive covenants in financing agreements: Some of the Company's financing agreements and debt arrangements set limits on and/or require the Company to obtain lender consents before, among other things, pledging assets as security. In addition, certain financial covenants may limit the Company's ability to borrow additional funds or to incur additional liens. In the past, the Company has been able to obtain required lender consents for such activities. However there can be no assurance that the Company will be able to obtain such consents in the future. If the financial or growth plans require such consents and such consents are not obtained, the Company may be forced to forego or alter plans, which could adversely affect the Company's results of operations and financial condition.
In the event that the Company breach these covenants, the outstanding amounts under such financing agreements could become due and payable immediately and/or resulting in increased costs. A default under one of these financing agreements may also result in cross-defaults under other financing agreements and result in the outstanding amounts under such other financing agreements becoming due and payable immediately. Defaults under one or more of financing agreements could have a material adverse effect on the Company's results of operations and financial condition.
Environmental Regulations: The automotive industry is subject to extensive Governmental regulations regarding vehicle emission levels, noise, safety and levels of pollutants generated by the production facilities. These regulations are likely to become more stringent and compliance costs may significantly impact the future results of operations. In particular, the US and Europe have stringent regulations relating to vehicular emissions. The proposed tightening of vehicle emissions regulations by the European Union will require significant costs for compliance. While the Company is pursuing various technologies in order to meet the required standards in the various countries in which the Company sell its vehicles, the costs for compliance with these required standards can be significant to the operations and may adversely impact the results of operations.
To comply with current and future environmental norms, the Company may have to incur additional capital expenditure and R&D expenditure to upgrade products and manufacturing facilities, which would have an impact on the Company's cost of production and the results of operations and may be difficult to pass through to its customers. If the Company is unable to develop commercially viable technologies within the time frames set by the new standards, the Company could face significant civil penalties or be forced to restrict product offerings drastically to remain in compliance. Moreover, meeting Government mandated safety standards is difficult and costly because crash worthiness standards tend to conflict with the need to reduce vehicle weight in order to meet emissions and fuel economy standards.