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    Tata Motors to cut mid-term capex by Rs 50,000 crore on path to zero-debt target

    Synopsis

    The company’s recent indications to investors and analyst comments suggest that it would continue with similar capex at least for FY22 and FY23 as well. That would translate into a reduction of over Rs 42,000 crore at JLR and Rs 9,000 crore in India over three years.

    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.

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    Mumbai: Tata Motors may slash more than Rs 50,000 crore from the previously estimated capital expenditure over three years at the Jaguar Land Rover unit and India operations, in a bid to achieve its ambitious target of wiping off debt from the balance sheet.

    Last year, the company had guided for a capex of 4 billion pounds (Rs 37,600 crore at current exchange rate) in each of the next three years at British luxury-vehicle unit JLR. On an average, Tata Motors spends about Rs 4,500 crore a year for the standalone India business. These have now been brought down to 2.5 billion pounds at JLR and Rs 1,500 crore for the ongoing fiscal year.

    The company’s recent indications to investors and analyst comments suggest that it would continue with similar capex at least for FY22 and FY23 as well. That would translate into a reduction of over Rs 42,000 crore at JLR and Rs 9,000 crore in India over three years.

    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.
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    The capex plan laid out for the ongoing fiscal 2021 is 2.5 billion pounds 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.

    The 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 pounds 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 pounds on capex compared with a quarterly run rate of 800-850 million pounds.

    The capex plan has been under high scrutiny in the wake of the 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 pounds, 2.42 billion pounds and 2.51 billion pounds 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 pounds in the first quarter of FY21, mainly due to higher working capital requirement. The debt on the JLR books rose to 6.56 billion pounds at the end of June 2020, compared with 5.88 billion pounds in FY20.

    The biggest factor that will determine the company’s success, though, is the 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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    3 Comments on this Story

    Leon Fernandes130 days ago
    good news. may it fructify.
    DG130 days ago
    These cuts at JLR are needed just to avoid increasing losses and force a breakeven. They will not be sufficient to produce a net positive cash flow large enough that the debt can be paid off. Besides, cuts in development of electric vehicles will basically leave JLR irrelevant to the market very quickly. On the Indian side, Tata Steel needs R&D budget both for product development and improving quality on existing products. Otherwise, they should shut down the passenger vehicle division and become a specialised commercial vehicle maker. Ideally, selling a large stake in JLR will be the best way to generate cash for JLR as well as Tata Motors India. But, who will buy?
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