How Brexit could pound Tata Motors’ earnings

Britain’s impending vote on an exit from the European Union, or the socalled Brexit, is creating uncertainty over earnings for Tata Motors, which derives 90% of its revenues from Jaguar Land Rover (JLR), which, in turn, reports its fi nancials in pound sterling, or GBP. The outcome of the referendum would be known a month from now and infl uence the GBP’s course. Analysts fear a 10-20% decline in GBP versus USD if the British public says ‘aye’ to a Brexit.

Consequently, the cost of insuring against wide swings in the GBP has reached its highest level in six years. Over the past year-and-a-half, Tata Motors’ investors have been dissecting economic and cars sales data from China to ascertain the impact on company’s fi nancials. But, the medium-term outcome of a political risk in Britain could be more critical for the company. Here’s the low-down.

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Debt Liability: JLR has nearly £1.54 billion of US dollar debt. If the pound depreciates by 10%, it may result in a mark-to-market (MTM) loss of approximately £200 million and reduce Tata Motors’ consolidated book value by 2-3%.



Dependence on EU: Almost a fi fth of JLR sales volume originates from EU and almost 50% of total components are sourced from the same geography. If the pound falls by 10%, it would shave 3-5% of the company’s estimated operating profi t for the current fi scal (FY17).

Impact on Currency Hedges: Nearly 60% of the total sales of the JLR are dollar denominated, but the company has several long-dated hedges. This means the impact of currency depreciation will refl ect meaningfully in the second-half of the next fi scal (FY18). However, nearly 15% and 27% of the projected income for the current and next fi scal is unhedged, this could lift margins in the range of 150-300 basis points.