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The Tata Motors stock slipped 11% over the last 10 days on slowdown in China sales and tough emission norms. While the stock fell earlier as global retail sales grew just 3% due to a steep fall in China sales, the recent fall was on account stringent emission norms.
Tighter norms mean that the company may have to entail higher costs to ensure vehicles meet the norms in stages by 2015 and 2020.
While the dip in sales was due to the Chinese New Year holidays is being considered a one-off, the company says that it would be able to comply new norms which require that fuel consumption fall to 6.9 litres per 100 kilometres.
Despite the negatives, analysts continue to keep the faith with most (44/61) having a buy recommendation on the stock. The Bloomberg consensus price target for the stock is at Rs 326, which is 20% higher than the current market price.
Jaguar Land Rover in a statement said that the company plans to meet the fuel consumption norms by using aluminium among others techniques to reduce weight, engine downsizing, direct injection engines and 9-speed transmission to be used in Range Rover Evoque. Some of the company’s 5 litre based engine models do not meet the standards.
The new norms mandate fuel efficiency targets both for individual models as well as corporate level (corporate average target fuel consumption or CAFC). Spark Capital analysts Mukesh Saraf and Narayanan Ravindranathan says that hough most of JLR’s individual models comply, the company would be lagging behind right now at the CAFC level.
However, having seen the sharp improvement in the new Range Rover’s fuel efficiency and plans of compact Jaguars, 2015 targets are achievable, they add.
China is a key market for JLR and is expected to contribute to a fifth of the sales volumes for the UK-based company. Analysts at Citi Research expect volumes from this geography to double over the next two years supported by a jump in dealerships.
“We expect China volume contribution to increase to a third of volumes in FY15, which would be supportive for overall margins," say Jamshed Dadabhoy and Arvind Sharma. The company gets better margins in the China market thanks to better product mix and pricing.
