The guiding principle for capex has been moved from “willingness to invest” to “ability to invest”, which means capex would be supported by operating performance and would not be invested independent of operating performance, Tata Motors told ET. The capex plan laid out for this fiscal is £2.5 billion for JLR and Rs 1,500 crore for the India business, and the company is expected to manage capex tightly in the subsequent years, a spokesperson said. Lower capital expenditure will be driven by avoiding investing in non-core areas (such as testing, which could be outsourced), forming more partnerships (such as with BMW) and prioritising capex for new platforms and electric vehicles.
Based on these measures, JLR said after Tata Motors announced first quarter results that it was expecting turning free cash flow positive from the ongoing second quarter. Tata Motor’s three-pronged approach to attain near-zero net debt by FY24 is based on free cash flow generation, monetisation of non-core assets and, if required, raising funds through equity instruments, the company told investors last week. Business-level free cash flow generation is the key part of the plan. It is pivoted on revenue improvement, cost-cutting and capex control plans laid out for four key businesses, including its auto finance business. JLR had on average spent £3.76 billion in the last three fiscal years. Motilal Oswal, in a note released based on the interaction with Tata Motors’ chief financial officer, said the capex would remain at similar levels beyond FY21. Lower spends are already reflecting. In the first quarter of this financial year, JLR spent £548 million on capex compared with a quarterly run rate of £800-850 million.
The capex plan has been under high scrutiny in wake of low utilisation of its facilities and uncertainty surrounding volume ramp up in the medium term. Through a series of cost-cutting measures, JLR has managed to lower its breakeven point to less than half a million units in the last one year. Research firm CLSA, in a recent report, projected capex of £2.06 billion, £2.42 billion and £2.51 billion for FY21, FY22 and FY23 for JLR. Based on an expected volume recovery and lower capex, CLSA estimated the net debt to Ebitda ratio of JLR to come down to 0.3 in FY23 from 1.8 in FY21.
JLR reported a cash burn of £1.51 billion in the first quarter of FY21, mainly due to higher working capital requirement. The debt on the JLR books rose to £6.56 billion at end of June 2020, compared with £5.88 billion in FY20. The biggest factor that will determine the company’s success, though, is recovery in the marketplace. The company has started witnessing some green shoots locally for passenger vehicles as well as for JLR in some of its key markets.
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