Tata Motors Earnings Preview: Jaguar Land Rover Sales To Rise Steeply, Fueled By China Growth

Indian automobile manufacturer Tata Motors (NYSE:TTM) is scheduled to announce Q4 and fiscal 2014 results on May 29. The company has seen its stock surge almost 60% in the last year despite a slowdown in domestic sales and export revenues for the standalone Tata Motors brand of passenger and commercial vehicles. Growth for the automaker has come from its Jaguar Land Rover business, which was acquired from the Ford Motor Company (NYSE:F) in 2008. We have divided Tata’s business into three segments: Tata and Other Brand Vehicles, Jaguar, and Land Rover. High interest rates, stagnant freight rates, high fuel prices, weak consumer sentiment, and lower infrastructure activity have stalled growth for Tata branded vehicles in the domestic market. However, Jaguar and Land Rover, which together form over 95% of the company’s valuation by our estimates, are expected to drive top line and volume growth for the company this fiscal year ended in March.

Our price estimate for Tata Motors is $38.95, which is roughly 4% lower than the current market price.

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Jaguar F-Type Adds Incremental Volumes

The premium car brand Jaguar witnessed a 37% jump in global retail sales to over 80,000 units in fiscal year 2014 ended March. ^[1] This increase in volumes can be attributed to the rising demand for luxury vehicles, especially in China, and successful new model launches by Jaguar. The British carmaker forayed into the sports car market, with the launch of its F-Type convertible in February last year. Retail sales for the convertible two-seater this fiscal stood at 8,566 units, contributing 11% to net Jaguar volumes, and adding incremental sales. This bodes well for the automaker as higher sales of this model not only boost volumes, but also improve the average revenue per model. In fact, the F-Type is almost one-and-a-half times as expensive as the bulk-selling XF, which formed 60% of Jaguar’s net volumes this fiscal. With the introduction of the F-Type Coupe in May, Jaguar will look for further volume growth going forward. According to LMC Automotive, the F-Type coupe could sell around 9,600 units this year alone. ^[2] The total tally for the F-Type (coupe and convertible) could thus reach 16,000 units this year, up from only 6,400 F-Type convertibles sold last year. Unit sales could further improve to 18,000 units by 2015, with China constituting one-sixth of the volumes, according to IHS Automotive. ^[2]

China To Drive Top Line Growth

China in particular is expected to drive sales growth for both Jaguar and Land Rover through March. Jaguar volumes more than doubled in China this fiscal, and the country is now the single largest market for the luxury car brand, constituting one-fourth of the net volumes. On the other hand, Land Rover’s sales rose 23% to over 83,000 units in China. Over 1.51 million luxury vehicles were sold in the country last year by our estimates, representing a year-over-year growth of 21%. The premium segment is expected to outpace growth in the overall Chinese automotive market through 2020, and surpass the 3 million annual sales mark by then. Increasing disposable incomes and rising proportion of high net worth individuals in China should drive growth in premium sales, and provide further potential growth opportunities for Jaguar and Land Rover.

With the proportion of China sales rising, the average revenue per unit is also expected to rise this fiscal year. China constituted 24% of Jaguar Land Rover volumes in fiscal 2014, up from 20.6% in the previous year. The British automakers import vehicles into China, and are subjected to the 25% import taxes, in addition to the value added tax and consumption tax. As exporting vehicles raises their prices, a higher proportion of China sales is expected to improve the average revenue per unit for the company. Higher taxes due to large export numbers should also cause expenses to rise this fiscal, which could somewhat offset the impact of increased sales on the net profitability. Going forward, Tata will start the production of its first SUV built in partnership with the Chery Automobile Company by the end of this year in China. Domestic production will not only increase Jaguar Land Rover’s reach and availability in the region, but will also help the company compete with other luxury automakers such as Audi, BMW, Mercedes-Benz, and Lexus on a pricing front.

Tata Branded Vehicles Continue To Underperform

According to the Society of Indian Automobile Manufacturers (SIAM), passenger vehicle sales declined 6% year-over-year in fiscal 2014, whereas commercial vehicles saw a substantial fall of 20% in volumes. ^[3] In fact, the Indian passenger vehicle market posted negative sales growth for the first time in 11 years this fiscal. Negative consumer sentiment due to high inflation, unstable fuel prices and high interest rates have hurt sales for automakers in India. Tata’s market share in the passenger car segment fell to 9.5% in 2013 from 15.3% in 2010. Seeing how Tata’s retail passenger car sales have declined by a whopping 38.6% through March, more than the corresponding decline of 4.65% in the overall industry, the company is set to relinquish further market share to its competitors. ^[4]

On the other hand, Tata’s commercial vehicle retail volumes also fell 30% during this period. The automaker’s light commercial vehicle (LCV) sales declined by 32%, after having risen 22% in the previous year. The decline in LCVs comes as investments in the real estate sector stood at only $1.2 billion in the calender year 2013, down a massive 65% year-over-year. ^[5] As pickup trucks are widely used for construction purposes, a decrease in construction projects significantly impacts commercial vehicle volumes. A possible uptick in the housing industry going forward, bolstered by development in smaller cities, could spur growth for Tata and the overall commercial vehicle market.

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1. Jaguar Land Rover flash figures 2013-2014 [↩]
2. F-Type coupe will lead Jaguar Land Rover premium car assault, March 2014, forbes.com [↩] [↩]
3. Indian Automotive Industry fiscal 2014 results [↩]
4. Tata flash figures 2013-2014 [↩]
5. Investments in realty shrank 65% in 2013, April 2014, thehindubusinessline.com [↩]