Tata Motors Earnings Review: Will The Gloom For Jaguar Land Rover In China End Soon?

-62.32%
Downside
25.14
Market
9.47
Trefis
TTM: Tata Motors logo
TTM
Tata Motors

Numbers don’t always tell the entire story, and this might be the case with Indian automaker Tata Motors (NYSE:TTM). The company announced its Q1 fiscal 2016 (ending March) results recently, with sales declining 6% year-over-year and profit after tax almost half of what it was in the last June quarter. The stock is down approximately 30% in the last three months alone, and the results reflect weakness in the premium vehicle division, Jaguar Land Rover (JLR), which saw wholesale vehicle deliveries drop 4% this quarter.

Tata Motors is a marriage between its standalone business and JLR, but the performance of the latter is more consequential to the company’s valuation; JLR forms almost 90% of the group’s net valuation, as per our estimates. And this is why – despite the 21% rise in revenues for the standalone business in Q1 fiscal 2016 and Tata passenger vehicles and medium and heavy commercial vehicles registering solid growth, our focus rests on the 6.5% drop in revenues and 390 basis contraction in operating margins at JLR.

See Our Complete Analysis For Tata Motors

But why numbers don’t tell the entire story is because the weak Q1 performance might be a case of bad timing. Bad timing because JLR is still in transition in China, and hasn’t reached a full roll-out of its compact vehicle.

Relevant Articles
  1. Tata Motors Stock Up After Announcement Of Investment In EV Business, Will It Sustain?
  2. Will Tata Motors Achieve Pre-Corona Stock Price?
  3. Can Tata Motors Stock Grow After A Slowdown Warning?
  4. Is Jaguar Land Rover 50%, 70%, Or 80% Of Tata Motors?
  5. Why Tata Motors Stock Has Rallied 30% Over The Last Week
  6. How Does Tata Motors Compare Against A Giant Like Toyota Motors?

When Will China Begin To Turn Around?

JLR’s first locally built vehicle in China hasn’t been received as well as expected. This is because of a number of factors. Firstly, the Chinese automotive market has slowed down, hurt by industry overcapacity and negative customer sentiment, so much so as to cause a fall in passenger vehicle sales in June (3.4% drop) in a country which was accustomed to double-digit percentage growths till a year or two ago. Consumers have remained wary of purchasing luxury vehicles as well, with Audi, the highest-selling premium automaker in China, reporting only a 1.9% year-over-year rise in China unit sales through the first half, and BMW reporting a fall in sales in the country in both May and June.

Passenger vehicle sales in China2

Secondly, JLR is suffering due to the tougher pricing environment in China. Chinese customers, who were once more inclined to go for the well-renowned and premium-priced foreign vehicle brands, are now choosing to opt for budget vehicles–typically SUVs and Crossovers. This is why the domestic manufactures, who had been losing market share over the last few years, have seen their shares rise 3.5 percentage points this year on higher sales of their budget SUVs and crossovers. Although JLR rolled out its locally built Range Rover Evoque in China, sales haven’t picked up as expected. The contribution of China to JLR’s net retail sales has decreased from 28% in Q1 fiscal 2015 to 18% this quarter, due to a large 33% fall in retail volume sales in the country. Cause for worry?

Maybe not. JLR has struggled to ramp up sales of the Evoque, which is rolling out from a completely new manufacturing facility in China, the first time JLR is building vehicles from scratch outside the U.K. It might take time for the company to speed up production. In addition, the British marquee brand has looked to plan import volumes in a way to ensure a smooth transition to domestically-produced vehicles by the end of the year. JLR’s sales in China have been hampered by rough economic conditions and lower supply, but could this turn around?

Passenger vehicle sales in China1

In order to boost its retail sales, the brand cut the starting price of its China-produced Evoque by 50,000 yuan ($8,050) to 398,000 yuan ($64,108) recently. [1] The locally-built Evoque is already lower priced than its imported counterpart, which starts from 528,000 yuan, due to the evasion of import duties and other taxes. The brand is also launching the new Jaguar XF and XJ models this year, and running out the Freelander, which will be replaced by the Discovery Sport. JLR’s China sales have been dragged down by the general non-conducive market conditions, but the fact that the brand is still in the process of speeding up production within the country and is phasing out certain models are reasons why JLR’s retail units have declined by even more than the market has. Once the reach and availability of the new locally-built models increase in the country, the company’s sales might begin to turn around, maybe from the December quarter, seeing how demand for premium SUVs and Crossovers remains strong.

The Compact XE Also Key To The Future

The compact premium vehicle, Jaguar XE, has sold less than 3,000 units since its launch in March, but there is a hope for this model. The XE is Jaguar’s response to the likes of Mercedes C-Class, Audi A3 and A4, and BMW 3-series– all of which are among the highest-selling models for their respective automakers. Let’s put this into perspective for JLR– Jaguar’s wholesale shipments in one fiscal year range between 70,000-80,000 units presently, and the compact saloon segment is approximately a 1.5 million units or more market, according to JLR. So a 5% market share, which seems pretty plausible once the availability of this model increases, will mean another 75,000 unit sales for Jaguar.

Not only will this model be accretive to the top line, but margins could also improve. Large investment and development costs coupled with lower wholesale shipments have dragged down operating margins this quarter, as aforementioned, but due to the high degree of operating leverage (automotive companies have large fixed costs), incremental volume sales could fetch more profit, going forward. So, in time, margins which dropped to 16.4% this quarter, could start rising again, depending upon when the output starts increasing.

Why China is so pivotal for JLR is reflected in the results. Despite the 28%, 21%, and 13% rise in retail sales in Europe (excluding U.K.), the U.K., and North America, the company’s financials appear weak, hurt by slower sales in China. The group has made huge investments in China over the last few years and will continue to do so. Although the Q1 results reflect weakness in JLR’s business, particularly in China, this might all change once the brand phases out old models and launches the likes of Jaguar XE and the new performance Crossover Jaguar F-PACE, which launches in 2016. The Q1 fiscal 2016 results might not be the whole story.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Jaguar Land Rover cuts China sales target amid demand slump []