According to the news report by Bloomberg, Tata Motors Ltd.’s Jaguar Land Rover announced its fourth quarter results in which it revealed that the company had been hit by a $4 billion loss in February.
Jaguar Land Rover stated that this loss was due to a £3.1 billion (~$3.9 billion) impairment charge imposed on it. Despite the fact that this charge was a non-cash one, the already high yields on the company’s bonds shot up even higher.
The reason for this was because about 50% of the value of the write down, which comes to around £1.55 billion, arises directly out of tangible assets. What this means is that these assets will now not yield the value the company hoped to get from them.
These assets’ value dropped due to poor market conditions in China, the rising cost of debt and disruptions in technology.
The other 50% of the loss comes from intangible assets, which represents money that has already flowed out of Jaguar Land Rover. Of the money already spent on investments as well as products, a large portion is related to intangibles such as intellectual property and technology. This amount is used as a benchmark to measure how much should be invested in future growth and technologies.
The question that is being raised at this time is why did the management wait for so long before writing down these investments. Jaguar Land Rover’s annual report for last year had stated that there was a risk of impairment because of higher future expectations of gross margins and/or sales volumes.
The report also stated that there was a possibility that changes in technology (such as the electrification of cars) as well as trends in the industry (such as the reduction of sales of diesel vehicles) had not be appropriately accounted for in the company’s impairment calculations.
This loss also underlines the increasingly delicate liquidity and cash situation. Jaguar Land Rover’s liquidity, which includes all of the free cash as well as £1.94 billion revolving credit facility due to mature in 2022, has declined sharply in the past 2 years. The company’s liquidity is now at £4.4 billion.
On the other hand, the luxury car maker’s total debt amount continues to rise. Jaguar Land Rover now has a total debt factor of £4.7 billion as of December 31, 2018.
While the negative free cash flow has reduced from the plunges in the first fiscal half of 2018, S&P Global Ratings’ analysis of the company’s situation shows that this metric will continue to be in the red for another 2 years. The challenge that the company is facing is that if the negative free cash flow continues to stay that the current average of £670 million (~$866 million) per quarter, then Jaguar Land Rover could have a huge struggle to make it to the end of this year.
Jaguar Land Rover continues to invest billions of pounds and some hundreds of millions more in dividends paid out to its parent company, Tata Motors, despite the fact that the company is facing huge operational issues. Capital expenditure is now falling in relation to operating cash flow, and if the company is unable to deliver on its cost-cutting strategies and sales volumes don’t go up, then the car maker will have to look into even greater spending on tangible assets to improve free cash flow.
The company has stated that negative cash flow is due to the pace at which it is investing in technology. However, considering the poor returns on earlier investments, investors are now questioning the company whether further spending would yield any better results.