ECONOMY OVERVIEW
INDIA
India has registered a robust and steady pace of economic growth in Fiscal 2016 as it did in Fiscal 2015. Additionally, macroeconomic parameters such as inflation, fiscal deficit and current account balance have exhibited distinct signs of improvement. Wholesale price inflation has been in negative territory for more than a year and the all-important consumer price inflation has declined to nearly half of what it was a few years ago. However, weak growth in advanced and emerging economies has taken its toll on India's exports. Nevertheless, trade and current account deficits have improved due to relatively lower prices for crude oil which is imported by India. Growth in agriculture has slackened due to two successive years of less than-normal monsoon rains. The rupee has depreciated with respect to the US dollar, similar to several other currencies in the world.
India's GDP for Fiscal 2015 increased by 7.2% and for Fiscal 2016 increased by 7.6%. Growth in agriculture and industry increased in Fiscal 2016 by 1.1% as compared to decline by 0.2% in Fiscal 2015 while services sector growth increased by 9.2% in Fiscal 2016 as compared to 10.3% in last year. Index for industrial production (IIP) increased by 2.4% in Fiscal 2016 as compared to 2.8% in Fiscal 2015. Significant factors influencing IIP growth in Fiscal 2016 included a 2.2% increase in the mining sector in Fiscal 2016 compared to 1.4% in Fiscal 2015, which was mainly due to an increase in coal production. The manufacturing sector increased by 2%, compared to 2.3% in Fiscal 2015 and electricity services increased by 5.6% in Fiscal 2016, compared to 8% in Fiscal 2015. The consumer durables grew by 12.4% in Fiscal 2016 as compared to negative of 12.5% in Fiscal 2015. (Source: Ministry of Statistics and Program implementation). The domestic auto industry witnessed growth during Fiscal 2016, driven by replacement demand and demand from the mining and construction sectors, mainly in the medium and heavy commercial vehicles or M&HCV sector.
WORLD
The global macroeconomic landscape in Fiscal 2016 was rough and uncertain and characterized by weak growth of world output. This situation was exacerbated by; (i) declining prices of a number of commodities, with the reduction in crude oil prices being the most visible among them, (ii) turbulent financial markets (especially the equity markets), and (iii) volatile exchange rates. Global growth remained moderate with uneven prospects across the major economies. The outlook for advanced economies is improving, while growth in emerging market and developing economies is projected to be lower, primarily reflecting weaker prospects for certain large emerging market economies alongside oil and raw material exporting economies. Oil prices have declined during Fiscal 2016 due to weaker than expected global activity and a weaker demand for oil. Exchange rate movements in recent months have been sizable, reflecting changes in expectations about growth and monetary policy across major economies. Long-term government bond yields have declined in major advanced economies, reflecting in part lower inflation expectations, the sharp decline in oil prices and weak domestic demand.
The US economy growth was stronger than expected with accompanying job growth, resulting in a decline in the unemployment rate. Furthermore, lower oil prices, increases in incomes and improved consumer confidence have resulted in growth in the US.
The Eurozone showed signs of economic improvement in 2015, with consumption supported by lower oil prices and higher net exports. Growth in the Eurozone gradually picked up, driven by lower energy prices, a weaker Euro and a loose monetary policy by the European Central Bank. Germany, France, Italy and Spain GDP grew in the region. In 2015, GDP in the UK slowed a little, but consumer spending growth remained relatively strong, partially due to lower oil prices.
China recorded a pronounced deceleration in growth in 2015, which suggests that China's slowdown over the past few years shows little sign of abating. The GDP growth rate moderated to 6.9% for 2015 and coincided with growing debt and excess housing and factory capacity. These developments, together with market concerns about the future performance of the Chinese economy, are having spillover effect on other economies through reduced trade and weaker commodity prices, as well as through diminishing confidence and increasing volatility in the financial markets.
Brazil's economy sank into its deepest recession in recent history in 2015, amid lower prices for key exports, soaring inflation and depressed confidence levels. Economic performance in Russia was impacted by the increase in geopolitical tensions, lower crude oil prices and economic sanctions. In Japan, growth in 2015 was 0.6%, reflecting weak consumption and decreasing investment by households. In South Africa, domestic growth remains weak due to weak external demand, despite being lower oil prices and inflation.
Risk Factors
Risks associated with the Company's Business and the Automotive Industry.
Deterioration in global economic conditions could have a material adverse impact on the Company's sales and results of operations.
The automotive industry and the demand for automobiles are influenced by general economic conditions, including, among other things, rates of economic growth, credit availability, 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 the Company's business, financial condition and results of operations.
The Indian automotive industry is materially affected by the general economic conditions in India and around the world. Muted industrial growth in India in recent years 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 in India, including the automotive and related industries. A continuation of negative economic trends or further deterioration in key economic metrics such as the 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's automotive sales in India and results of operations.
In addition, the Indian automotive market and the Indian economy are influenced by economic and market conditions in other countries. Although economic conditions are different in each country, investors' reactions to economic developments in one country can have adverse effects on the securities of companies and the economy as a whole in other countries, including India. A loss of investor confidence in the financial systems of other emerging markets may cause volatility in Indian financial markets and, indirectly, in the Indian economy in general. Any worldwide financial instability could also have a negative impact on the Indian economy, including the movement of exchange rates and interest rates in India. A slower than expected global economic recovery or a significant financial disruption could have a material adverse effect on the Company's cost of funding, portfolio of financing loans, business, prospects, results of operations, financial condition and the trading price of the Company's shares or American Depositary Shares, or ADSs.
The Company's Jaguar Land Rover business has significant operations in the United Kingdom, North America, continental Europe and China as well as sales operations in other overseas markets across the globe. Automotive markets in the United States, United Kingdom, and Europe experienced growth in Fiscal 2016 as did the automotive market in China, despite the softer economic conditions and financial market volatility experienced in China. However, automotive sales in emerging markets such as Brazil, Russia and South Africa have deteriorated during Fiscal 2016. Given these economic conditions, Jaguar Land Rovers' ambitions for growth may not materialize as expected which could have a significant adverse impact on its financial performance. If automotive demand softens because of lower or negative economic growth in key markets (notably China) or other factors, the Company's operations and financial condition could be materially and adversely affected.
The United Kingdom's exit from the European Union (EU) may adversely impact our business, results of operations and financial condition.
In a non-binding referendum on the United Kingdom's membership in the European Union in June 2016, a majority of the electorate voted for the United Kingdom's withdrawal from the European Union. If the outcome of the referendum eventually results in the exit of the United Kingdom from the European Union ("Brexit"), a process of negotiation would determine the future terms of the United Kingdom's relationship with the European Union. Depending on the terms of Brexit, if any, the United Kingdom could lose its present rights or term of access to the single EU market and to the global trade deals negotiated by the European Union on behalf of its members. New or modified trading arrangements between the United Kingdom and other countries may have a material adverse effect on the export volumes of our Jaguar Land Rover business. A decline in trade could also affect the attractiveness of the United Kingdom as a global investment centre and, as a result, could have a detrimental impact on the level of investment in UK companies, including our Jaguar Land Rover business, and ultimately on UK economic growth. The uncertainty concerning the timing and terms of the exit could also have a negative impact on the growth of the UK economy and cause greater volatility in the pound sterling. Changes to UK border and immigration policy could likewise occur as a result of Brexit, affecting our Jaguar Land Rover business's ability to recruit and retain employees from outside the United Kingdom. Any of the foregoing factors may have a material adverse effect on our business, results of operations and financial condition.
Restrictive covenants in financing agreements may limit the Company operations and financial flexibility and materially and adversely impact the Company's financial condition, results of operations and prospects.
Some of the Company's financing agreements and debt arrangements set limits on or require it to obtain lender consent 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 consent for such activities. However, there can be no assurance that it will be able to obtain such consents in the future. If the Company's liquidity needs, or growth plans, require such consents and such consents are not obtained, it may be forced to forego or alter plans, which could materially and adversely affect the Company's financial condition and results of operations.
If the Company breaches its financing agreements, the outstanding amounts due thereunder could become due and payable immediately or result in increased costs. A default under one of these 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. The Company's lenders and guarantors could impose additional operating and financial restrictions on the Company, or otherwise seek to modify the terms of its existing financial agreements. This could have a material adverse effect on the Company's financial condition and results of operations.
Exchange rate and interest rate fluctuations could materially and adversely affect the Company's financial condition and results of operations.
The Company's operations are subject to risks arising from fluctuations in exchange rates with reference to countries in which the Company operates. The Company imports capital equipment, raw materials and components from, manufactures vehicles in, and sells vehicles in various countries, and therefore the Company's revenues and costs have significant exposure to the relative movements of the GBP, the US dollar, the Euro, the Russian Ruble, the Chinese Renminbi, the Japanese Yen and the Indian rupee.
Moreover, the Company has outstanding foreign currency denominated debt and is sensitive to fluctuations in foreign currency exchange rates. The Company has experienced and expects to continue to experience foreign exchange losses and gains on obligations denominated in foreign currencies in respect of the Company's borrowings and foreign currency assets and liabilities due to currency fluctuations.
The Company also has interest-bearing assets (including cash balances) and interest-bearing liabilities, which bear interest at variable rates. The Company is therefore exposed to changes in interest rates in the various markets in which it borrows. Although the Company manages its interest and foreign exchange exposure through the use of financial hedging instruments such as forward contracts, swap agreements and option contracts, higher interest rates and foreign exchange volatility could significantly increase the Company's cost of borrowing, which could have a material adverse effect on its financial condition, results of operations and liquidity.
Intensifying competition could materially and adversely affect the Company's sales, financial conditions and results of operations.
The global automotive industry is highly competitive and competition is likely to further intensify in light of continuing globalisation and consolidation in the worldwide automotive industry. Competition is especially likely to increase in the premium automotive categories as each market participant intensifies its efforts to retain its position in established markets while also expanding in emerging markets, such as China, India, Russia, Brazil and parts of Asia. Factors affecting competition include product quality and features, innovation and the timing of the introduction of new products, cost control, pricing, reliability, safety, fuel economy, environmental impact (and perception thereof ), customer service and financing terms. There can be no assurance that the Company will be able to compete successfully in the global automotive industry in the future.
The Company also faces strong competition in the Indian market from domestic as well as foreign automobile manufacturers. Improving infrastructure and robust growth prospects compared to those of other mature markets have attracted a number of international companies to India either through joint ventures with local partners or through independently owned operations in India. International competitors bring with them decades of international experience, global scale, advanced technology and significant financial resources. Consequently, domestic competition is likely to further intensify in the future. There can be no assurance that the Company will be able to implement future strategies in a way that will mitigate the effects of increased competition in the Indian automotive industry.
Designing, manufacturing and selling vehicles is capital intensive and requires substantial investments in manufacturing, machinery, research and development, product design, engineering, technology and marketing in order to meet both customer preferences and regulatory requirements. If competitors consolidate or enter into other strategic agreements, they may be able to take better advantage of economies of scale or enhance their competitiveness in other ways. Competitors may also be able to benefit from the cost savings offered by consolidation or alliances, which could adversely affect the Company's competitiveness with respect to those competitors, which could also materially reduce the Company's sales as well as materially and adversely affect its business, financial condition and results of operations.