(Bloomberg Opinion) -- These days, any news seems to be good news for Jaguar Land Rover.
After Tata Motors Ltd.’s U.K. unit posted 120 million pounds ($152.8 million) of pretax profits(1) and positive free cash flow for the quarter, the company’s U.S.-listed shares rose as much as 10% in pre-market trading and bond prices ticked up. Both numbers remain deep in the red for the year.
That leaves little to cheer. Rather than generating gains from dramatic cost cuts and other measures to boost the bottom line, its meager earnings came on the back of spending less on non-core manufacturing and working-capital improvements. Mumbai-listed Tata Motors dropped around 4.7% in early trading on Tuesday.
Outgoing Chief Financial Officer Kenneth Gregor said the company “very much over-delivered” on inventory reduction and working capital. But there’s a bit of seasonality in those trends, and inventories are still elevated. While management said it expects free cash flow to improve, the figure is forecast to stay negative through the 2021 fiscal year.
Commendably, Jaguar did lay out its progress toward restructuring. Since the launch of “Project Charge” in September, the company has completed 70% of its objectives in terms of lowering investment and 80% of its working-capital goals set for March 2020.
That was the easy part: As we’ve written, Jaguar was spending far too liberally, in addition to mismanaging inventory in China. The company is hoping to cap annual investment spending at 4 billion pounds for the next few years. Yet at the current rate, that's still close to 20% of its top line. Meanwhile, Tata Motors has boosted outlays in India. With little prospect that sales and profitability will rise, expenses need to fall.
On costs and profits, however, Jaguar Land Rover is much farther behind, having reached just 20% of its goal. This is the tough part. These targets ultimately determine the company’s precarious free-cash-flow position and its ability to manage its debt.
The initial costs to reduce core expenses will be painful and large. In a voluntary redundancy program revealed last quarter, Jaguar took a charge of around $200 million. The company didn't give much guidance about how it plans to further lower expenses, besides previously announced job cuts and spending less on marketing. Jaguar said margins would remain around a paltry 3% to 4% through fiscal 2021.
Then there’s the company’s encumbered balance sheet. Over the course of the past year, Jaguar’s debt to earnings before interest, taxes, depreciation and amortization rose to 2.3 times from 1.3 times. Management said total debt – at 4.5 billion pounds, compared with 3.7 billion pounds – would remain around current levels for the next few years.
Let’s not forget the industry-wide challenges. Demand for cars is either plateauing or slowing, while Brexit and the trade war loom. In India, the commercial-vehicle cycle looks to be peaking and consumers aren’t buying cars. Tata Motors’ truck business could suffer more under new rules in areas such as freight capacity and emissions.
Instead of looking for the needle of good news in the haystack, investors may be better off wondering how meaningful these improvements really are.
(Corrects an editing error in the penultimate paragraph that misidentified the owner of Tata Motors' truck business.)
(1) After restructuring costs.
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Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
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