Tata Motors’ Growth Slows In Q2, But Bright Prospects Ahead

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Tata Motors‘ (NYSE:TTM) Q2 consolidated financial results fell short of analyst expectations, which saw the Indian automaker’s stock fall 2.6% just after the results were announced on Friday. Although net revenues rose 6.5% to over $9.8 billion in the second quarter of fiscal 2015 ending in March, this growth was much slower than the 38% growth seen in the previous quarter, and the double-digit sales growth through the last quarter. Yet again, the driver of growth for Tata Motors this quarter was the British luxury marquee Jaguar Land Rover (JLR), which witnessed an 8% rise in retail sales worldwide, as demand for luxury vehicles remained strong in key markets. The dampener in an otherwise booming premium vehicle business for the group was the ailing standalone segment. Despite a slight uptick in sales of medium and heavy commercial vehicles in India, lower sales of light commercial vehicles and passenger vehicles dragged down the India business’ sales in Q2. In fact, the company’s volumes in India fell 18.75% year over year between April and September, while overall market volumes rose by 4.25% during this period. [1]

Despite continual increases in volume sales at JLR, investor reaction to the results reflected slight disappointment, mainly as the growth fell short of expectations and previously reported strong growth figures. Weak economic conditions in Brazil and Russia lowered the company’s volumes this quarter, and depreciation of certain foreign currencies also hurt revenues. But the key for Tata is that its sales in its biggest markets- China and Europe, continue to remain strong. While the overall results might be construed as the start of slowing growth for Tata and its robust luxury vehicle division by some, we believe that the company is geared for strong growth, beginning next fiscal, on the back of new launches and local production in China.

Trefis price estimate for Tata Motors is $47, which is roughly in line with the current market price.

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China Demand Remains Strong, Local Production To Start In Q4

The key for JLR amid speculation of slowing growth is its solid China growth. The British automaker’s combined volumes in the country rose by 22% year over year to form nearly 28% of the net volumes. China is not only the fastest growing automotive market in the world, but the demand for premium vehicles in particular is also very high in the country. Only second to the U.S., China’s luxury vehicle market is expected to grow at around 13.0% to 13.5% this year, more than the expected 8.3% growth for the country’s overall vehicle market. This is because the penetration of luxury vehicles still remains relatively low in China, and with increasing disposable incomes, sales of these vehicles are anticipated to rise. Compared to around 10-11% contribution of premium vehicles to the overall vehicle volumes in the U.S., the figure for China stands at around 7%, according to our estimates. In fact, China is expected to surpass the U.S. as the world’s largest luxury automotive market in a couple of years, and cross 3 million in sales volumes by 2020, up from an estimated 1.52 million unit sales in 2014.

Demand for luxury vehicles and JLR in particular remains robust in China, but what could be a shot in the arm for the premium vehicle division is the beginning of local production in the country by Q4 of this fiscal year. Local production could potentially increase Jaguar Land Rover’s China volumes significantly, once retail sales of made-in-China models starts in the first quarter of fiscal 2016. Jaguar Land Rover will extend complete manufacture of its vehicles beyond the U.K. for the first time, with the Range Rover Evoque as the first locally produced model. Why JLR’s volumes could drastically increase in China, apart from continued strong overall demand for premium vehicles in the country, is primarily because of two factors:

  • Model Prices Will Go Down: JLR aims to build three models in the China plant, with an initial annual production capacity of around 130,000 vehicles, by 2016. [2] Local production will help JLR evade China’s 25% import taxes, as well as bring down model prices. In fact, the imported Range Rover Evoque is around 1.61 times as expensive as the locally-built Audi Q5, reflecting how imported cars are less competitive on the pricing front. Jaguar Land Rover’s vehicle prices are expected to fall by 15% on account of local production, which should help the automaker gather higher volume sales, going forward.
  • High Demand For Premium SUVs: The market for luxury SUVs in China is expected to double to 1.2 million units by 2020, further boosting Land Rover’s growth prospects in the country. Just for reference, less than 200,000 units of luxury SUVs were sold in China in 2010. [3] Land Rover is aiming to grab around 10% share in this market on the back of anticipated high demand for the locally manufactured models, which means that the brand’s China volumes could rise by 55% from 2013 levels by the end of the decade. According to our estimates, Land Rover’s net volumes could double to nearly 730,000 units by fiscal 2020 ending March, up from 351,245 unit sales in fiscal 2014.

Average Revenue Per Model To Go Down, But Volumes To Rise

We expect JLR’s volumes to rise aggressively in the future on account of local production in China and also due to the much anticipated launch of the compact saloon Jaguar XE, which goes into production in Q4. The XE is set to be a volume model for Jaguar, which will compete with bestsellers such as BMW 3-series, Audi A3 and A4 and Mercedes-Benz C-Class in the lower-end of the premium vehicle market. Following the launch of the XE, we expect volumes for the British manufacturer to increase significantly, but the average revenues per vehicle to fall on account of the lower prices for the XE. In addition, local production in China will also bring down model prices and lower average revenue for JLR in China. If we estimate JLR’s China volumes to grow by 30% annually through fiscal 2017, locally produced vehicles might be able to supply over two-thirds of the anticipated demand, bringing down average revenues per model.

This is why we expect Jaguar and Land Rover’s average revenues per model to fall by 10% between fiscal 2014 and 2020. However, if the figure remains flat during this period due to higher sales for more expensive models such as the Jaguar F-Type and Range Rover Sport, our price estimate for Tata Motors would increase by 10%.

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Notes:
  1. Automobile sales yet to stabilize, siamindia.com []
  2. Tata Motors earnings transcript []
  3. China plant prompts Land Rover to target 10% market share, bloomberg.com []