Sterling Performance

Following on from our note on the Moody's rating actions, we commented that there were a lot better relative value opportunities in the £ fixed income sector compared to gilts. Well, yesterday gave us another prime example.

Yesterday’s release of Q3 (3mths to 31-Dec-12) numbers by Tata Motors is a perfect example of the opportunities that continue to appear in a market that continues to move in an inefficient and systemic manner. Tata announced a highly impressive quarterly result as sales of their Jaguar Land Rover (JLR) unit continue to beat all expectations.

During the quarter revenues at JLR increased 41% on the previous year to £3.75bn generating pre-tax profit of £440m (+57.4%) thanks to an impressive EBITDA margin of 20.1%.

Bought from Ford in 2008 for £1.5bn, the JLR unit has been one of the great corporate turnaround stories of recent years, with the company turning a loss-making group into one generating pre-tax profits of £51m in 2009/10, £1.1bn in 2010/11 and £976m in the first 9-mths of 2011/12.

Specifically, JLR has a GBP 8.125% 2018 bond outstanding which currently trades in the secondary market at 101.00 thereby offering investors a yield of 7.88%; and in contrast with the UK these bonds are more likely to be upgraded than downgraded (albeit from a much lower ratings category).

Clearly, despite the challenges of the global economic backdrop, there remain some very compelling investment stories and for the medium-term investor the outlook is not as gloomy as many of the headlines may suggest.