 "Tata Motors: JLR's China volumes to recover")
The Tata Motors’ stock was down 2.7 per cent after a Tata Group company, Tata Steel, sold a part of its holdings and on uncertainty regarding the slowing of its automobile sales in China.
August sales in China were down 31 per cent than a year ago, pulling down Jaguar Land Rover’s (Tata Motors’ luxury vehicle maker) global retail sales for the month by three per cent. While volume growth remained strong across developed markets, growing in double digits, those in China, Russia and Brazil put it back. Volumes for the Range Rover Evoque fell 20 per cent year-on-year.
Analysts at Barclays say there are near-term risks to the outlook for premium brands in China, with the recent stock market correction and capacity expansion plans of automobile makers there. The analysts see more risk to pricing than to volumes, as luxury car makers react to market softness by getting more aggressive.
The bad news, though, ends here for Tata Motors. Analysts at Kotak Institutional Research and Motilal Oswal Securities believe the China slowdown is transitory and volumes should recover in the second half of FY16, especially those of the Evoque, given the price cut in July. Launch of the Evoque with new Ingenium engines shortly is expected to boost volumes, with lower emissions and improving fuel efficiency.
Kotak’s analysts say JLR volumes have remained weak in the first half of calendar year 2015, due to transition issues related to launch of new models, start of joint venture production in China and start of an engine facility in the UK. With most of the issues being sorted out, volumes should start improving.
A key trigger will be the new launches in China, including the Discover Sport in the September quarter, new XF and XE models (Jaguar) from the December quarter, as well as ramp-up of the China-made Evoque from the September quarter. More of new launches in other markets will further fuel the volumes. New product launches are key volume drivers if sales of Mercedes vehicles in China are any indication. While Audi and BMW’s sales in August were down 1.4 per cent to 4.1 per cent year-on-year, Mercedes grew 46 per cent with a strong product line-up.
The other trigger for Tata Motors is the India business growth, driven by cyclical recovery of the medium and heavy commercial vehicles segment. This is expected to grow at a compounded annual rate of 24 per cent during FY15-18, against a contraction of 10.5 per cent during FY12-15. Improvement in standalone volumes (including passenger vehicles) with growth of 19 per cent annually during FY15-18 and margin growth from loss at the operating level (minus eight per cent) to eight per cent during FY15-18 will drive cash flows.
Given the attractive valuations (price to earnings ratio of six and enterprise value to operating earnings at three times, both based on FY17 estimates), most analysts have a 'buy' rating on the stock.
