Jaguar Land Rover tariff hit compounds Tata Motors’ domestic woes

This will directly affect Tata Motors, whose Jaguar Land Rover (JLR) vehicles are primarily manufactured in the UK and other markets and will continue to face a 25% tariff. Tata Motors' domestic operations are also under pressure as demand weakens amid the economic slowdown.

With the company facing domestic and international challenges, it will likely experience a slowdown, too. This article explains how much of an effect these challenges could have, and how Tata Motors' India operations are currently faring.

JLR under pressure on several fronts

JLR remains a cash cow for Tata Motors, contributing 69% of its consolidated revenue in FY24. The US contributed nearly 23% of JLR sales and almost 15% of Tata Motors' total revenue. However, with such a high revenue concentration, the JLR remains a pain point for Tata as it is exposed to global macroeconomic conditions.

This is evident from JLR’s financials. After the pandemic, the company returned to profitability only in FY24 as demand didn't take off as expected. JLR revenue in FY24 jumped 27% year-on-year to £2,899 crore, driven by a 25% jump in wholesale sales volume to 401,000.

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As revenue increased, JLR's Ebit margin expanded by 610 basis points to 8.5%. Higher margins helped it return to a profit before tax (PBT) of £2.16 billion. Its free cash flow also surged from £520 million to £2.27 billion, marking a significant recovery. Consequently, Tata Motors' stock price surged more than 100% from April 2023 to July 2024.

With this turnaround, JLR expected the momentum to continue in FY25 despite emerging signs of weak demand. It also announced an ambitious target of becoming net-debt-free by the end of FY25. However, reality has played out differently.

Contrary to expectations, the year turned out to be a mixed bag.Wholesale volume remained flat compared to last year. But the segment did meet its net debt-free guidance, ending the year with a net cash position. JLR has yet to report its detailed FY25 financials.

North America leads in volumes and revenues

North America remains the largest market for JLR, contributing 26.3% of volumes, followed by the UK (20.5%), Europe (20%) and China (13%). North America also leads in revenue, contributing 22.5%, ahead of China (18.9%), Europe (18.6%), and the UK (17.5%).

In FY24, North America also led in volume growth, with volumes increasing 30%, followed by the UK (33%), China (17%) and Europe (8.7%). This recovery across key markets supported JLR's turnaround. However, signs of fatigue started emerging in the first nine months of FY25.

Besides North America, where volume grew 25%, all other geographies had a muted performance. Volumes in the UK remained flat, while Europe and China saw a 18% and 4% decline, respectively, as their economies slowed. Consequently, JLR revenue remained flat, although PBT rose 7% due to a slight margin improvement.

All this underscores one thing. North America continues to be a critical market for JLR – in terms of both volumes and revenues. This makes the 25% import duty by the US particularly concerning. Given its exposure, JLR will likely feel pressure from this tariff hit. In response, the brand has halted US exports and is reassessing the situation.

No lifelines

This also comes at a time when both the Chinese and European markets – large enough to offset some of the pressure – are facing headwinds. As a result, developments in North America, the only region showing consistent growth, are likely to hit JLR hard.

According to CLSA, 60% of JLR’s portfolio in the US is priced above $85,000. Thus, any price hikes will not affect this more brand-conscious cohort. However, the remaining 40%, priced between $50,000 and $85,000, will see a 26% decline in volume. Overall, analysts expect a 14% volume contraction from over 400,000 units sold globally in FY24.

To compensate for this, Morgan Stanley said, JLR has three options: cut costs, bear the additional burden, or pass it on to the consumer. If JLR chooses to bear the impact, its margins will decline by up to 2%, leading to an 8.3% contraction in FY26 Ebit estimates. In addition, JLR's free cash flow could also turn negative.

Meanwhile, Kotak Institutional Equities expects JLR's net profit to drop by 31% and 37% if 25% and 15% of the tariffs are passed on to consumers. It may thus be forced to consider setting up a manufacturing base in the US to reduce losses, which is a lengthy process.

All of this will impact JLR's recovery, and in turn Tata Motors, which is already under pressure in the domestic market. Notably, Tata Motors' share price has fallen 35% in the past six months, and has halved from its peak.

Slowing economy hits domestic business

Tata Motors' domestic operations–which include passenger and commercial vehicles–have been under pressure due to short-term headwinds. Tight monetary conditions, high inflation, elevated interest rates, and stagnant wages contributed to the slowdown.

In the passenger vehicles segment, revenue declined by 5.3% to ₹3,590 crore in 9MFY25 compared to the previous year. However, segment Ebitda improved by 50 basis points to 6.6%, led by cost optimisation efforts and production-linked incentives worth ₹180 crore.

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Despite the margin gains, PBT declined 22% to ₹700 crore, impacted by lower volumes, an unfavourable mix, and weak realisation. The electric vehicle segment, once a stronghold for Tata, is also seeing signs of stagnation. High costs, slow adoption, and high competition caused its EV market share to fall from 73% in Q3FY24 to 53% in Q3FY25.

The commercial vehicle segment also faces similar challenges. Market share fell to a more than two-year-low of 37.7% in 9MFY25 from 41.7% in FY23. Revenue declined by 6.4% to ₹5,360 crore. However, the Ebitda margin improved 120 basis points to 11.6%. This offset weaker revenue growth, resulting in a 12% rise in profit before tax to ₹460 crore.

What’s next?

Tata Motors is focused on regaining demand growth in its domestic operations. For this, it aims to relaunch its SUV Curvv during the ongoing Indian Premium League. It also plans to launch a variant of its best-selling model, Ultroz, to reverse its declining market share. It is also expanding its service outlets to improve customer experience. The company is working on reviving growth in the commercial vehicle segment in FY26 and plans to appoint a new leader to drive the turnaround.

Tata Motors is also looking to unlock value by demerging its commercial and passenger vehicle businesses. This would allow both entities to focus on their core strengths and pursue independent growth strategies. The demerger is expected to take effect in Q3FY26.

Conclusion

Tata Motors is expected to be hit hard by a potential volume contraction in JLR, its growth engine, as nearly a quarter of its revenue comes from North America. While other regions such as China and Europe could have offset some of this pressure, slower growth in these markets means JLR faces demand pressure on several fronts.

The domestic business is also under pressure, but recent interest rate cuts and tax benefits may help revive demand.

It's worth noting that the automobile sector is cyclical and closely tied to broader economic growth. Thus, despite short-term headwinds across segments, Tata Motors is strategically placed to benefit from rising vehicle penetration in India, which lags global standards at around 30 vehicles per 1,000 people.

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At the current valuation, much of the concern appears to be priced in. The stock trades at a price-to-earnings multiple of 6.7, more than 50% below the 10-year median of 14.3. It trades at a steep discount compared to its peers Mahindra & Mahindra (26.8) and Maruti Suzuki (25) — a gap that persists due to its historically volatile performance.

Nonetheless, a recovery hinges on how well JLR navigates the uncertain demand environment, and a potential demand rebound in the domestic business. Tata Motors has previously brought JLR back from the brink and turned around its India passenger vehicle business to regain market share, bringing hope that it can do so once again.

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About the author: Madhvendra has over seven years of experience in equity markets and has cleared the NISM-Series-XV: Research Analyst Certification Examination. He specialises in writing detailed research articles on listed Indian companies, sectoral trends, and macroeconomic developments. Follow him on LinkedIn.

Disclosure: The writer does not hold the stocks discussed in this article.

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.