MUMBAI (Reuters) - Tata Motors will double investments in its Jaguar Land Rover brands to 1.5 billion pounds a year, even as the Indian automaker warned that it will be a challenge to sustain high margins at its key profit generator.
With soaring revenues and expanding margins, Jaguar Land Rover (JLR) has driven the company’s growth in recent quarters, as strong demand in emerging countries for the famous British brands offset sluggish performance in Tata’s home market.
“Over the past 5 to 6 years, JLR has spent around 700 to 800 million pounds annually on capital expenditure and product development. Going forward, we will double that,” C.R. Ramakrishnan, Tata’s chief financial officer, said on Tuesday.
“JLR spending will be in the order of 1.5 billion pounds each year,” Ramakrishnan told reporters, adding that the increase would apply in the current fiscal year ending in March.
JLR contributed 95 percent of the company’s profit in the quarter to end-December, with a profit margin of 20 percent, three times the profitability seen at Tata’s domestic business.
Sustaining such high margins in coming quarters would be “a challenge” for JLR, Ramakrishnan added, as sales growth likely moderates.
Sales of its new compact Evoque SUV accounted for much of JLR’s revenue growth in the fiscal third quarter, alongside surging demand in emerging markets such as Russia and China.
Tata has selected a joint venture partner for manufacturing JLR cars in China and is awaiting approval from government regulators in the world’s fastest-growing auto market, Ramakrishnan said.
An announcement on the company’s China joint venture will be made “very soon,” he added, without giving details.
JLR had agreed in principle to develop a luxury car with China’s Chery Automobile in order to win approval for a manufacturing venture, a Chinese newspaper reported in December.
Tata’s joint venture with Fiat SpAFIA.MI, through which the Italian automaker utilises the company’s distribution network in India, is not producing the expected financial results or sales, Ramakrishnan said.
Fiat and Tata have held meetings to discuss new measures to improve the Italian automaker’s sales in the country, Ramakrishnan added, but there were no plans to end the tie-up.
Tata, part of the global tea-to-technology Tata Group, has a product range that includes the British luxury brands famous for sleek saloons favoured by prime ministers and off-road vehicles used by armed forces, and the ultra-cheap Nano car.
The company posted a 40.5 percent rise in profits in the quarter to end-December, as sales by JLR, which Tata bought in 2008 for $2.3 billion, offset sluggish sales by its domestic arm hit by high costs and interest rates.
The increased investment in JLR would mainly be spent on developing new products and technology, Ramakrishnan said.
Tata’s domestic business has been hit by rising input costs, as demand moderates on high interest rates and increased fuel costs. The entry of many global brands has also put pressure on Tata’s commercial vehicle business, where it traditionally has enjoyed the lion’s share of the market.
“The commercial market is certainly getting tougher,” said P.M. Telang, managing director of Tata’s India operations.
“We expected over the past few years global competitors to come in... and are upgrading our commercial vehicle range to meet that,” he added.
Swedish truck maker Scania AB SCVb.ST said last month it will invest 1.5 billion rupees in an assembly plant in southern India, joining truck makers such as Daimler AG and AB Volvo in the fast-growing market.
Writing by Sumeet Chatterjee; Editing by Aradhana Aravindan