MUMBAI – Jaguar Land Rover, the luxury unit of Indias biggest automaker, is betting surging sales in China will help it defray royalty payments triggered by the company setting up factories outside Britain.
Jaguar is liable to pay royalties to Ford, which sold the brands to Tata Motors in 2008 for $2.5 billion, for use of the platform required to make its best-selling cars when manufactured outside Britain, it said last month in a U.S. regulatory filing. The unit of Mumbai-based Tata Motors will build vehicles to suit Chinese markets, spokeswoman Kay Francis said in an email.
The owner of the prestige brands is banking on rising volumes in China, which trumped Britain as its biggest market in 2012, to counter the levies amid growing popularity of its cheaper models that stalled profit, according to Umesh Karne, an analyst with BRICS Securities. Shifting focus to the worlds biggest auto market helped Jaguar Land Rover sell a record 357,773 vehicles last year even as total car sales in Europe plunged to its lowest in 19 years.
The management is very confident about doing well in China, said Mumbai-based Karne. While royalty payments will affect margins, Jaguar Land Rover may be able to offset this by saving on import duties and thereby being able to reduce prices and increase volumes.
Tata Motors in the Jan. 23 filing said margins in the three months through December may have declined because of the pound weakening against other currencies and higher sales of its best-selling model.
Profit at Tata Motors, led by Cyrus Mistry, may have dropped 13 percent to 29.5 billion rupees ($549 million) in the three months to Dec. 31, according to the median estimate of 35 analysts compiled by Bloomberg.
The company on Nov. 7 reported net income in the quarter ended Sept. 30 rose 11 percent to 20.8 billion rupees, from 18.8 billion rupees a year earlier, missing analysts estimates.
The average selling price of models such as the Jaguar XF, Land Rover Freelander and the best-selling Evoque is about 30,000 pounds ($47,500), compared with the 42,000-pound average on other models, Vijay Somaiya, the head of treasury and investor relations at Tata Motors, said on a conference call.
Jaguar Land Rover will have to pay access fees and royalties when producing models based on the EuCD platform developed by Ford.
The Freelander and Evoque are among the vehicles built on the so-called European D-class platform and eligible for the payments to Ford if made outside Britain.