Compact Sedan Zest Breathes New Life In Tata’s Domestic Sales

The Indian automaker Tata Motors (NYSE:TTM) saw revenues rise 23% year-over-year to 2,328 billion rupees (around $39.46 billion) in the fiscal year ended March 2014. This increase was primarily fueled by growth in volumes for the luxury brands Jaguar and Land Rover. The dampener in an otherwise booming premium vehicle business for the group has been the ailing standalone segment. Tata branded vehicles formed 57% of net volumes in the last fiscal year, but this division constitutes less than 5% of the company’s valuation by our estimates. This is mainly due to lower average vehicle prices for this division, and fatter margins for the Jaguar and Land Rover divisions. In fact, compared to the average revenue per unit of $75,229 for Jaguar Land Rover brands, the figure for Tata brands stood at $11,722 in fiscal 2014. It has been a tale of declining sales for the company in India in the last couple of years, with the passenger car segment volume sales declining 14% year-over-year in the first eight months of the fiscal year ending March 2015.

Trefis’ price estimate for Tata Motors is $47, which is around 11% above the current market price.

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Part of the problem why Tata’s passenger vehicle volumes declined in India in the last couple of years was a non-conducive automotive market environment. Negative consumer sentiment due to high inflation, unstable fuel prices, and high interest rates hurt demand for automobiles in the country. Passenger vehicle sales declined 6% year over year in fiscal 2014, posting negative sales growth for the first time in 11 years. However, with a stable government at the center, falling fuel prices, lowered excise duty, and an overall uptick in economic activity in the country, passenger vehicle volumes are up 3.82% in the April-November period this year. ^[1] This means that Tata’s passenger vehicle volumes have declined this fiscal, despite a rise in demand in the domestic market.

A perception of poor quality  and higher acceptance in fleet have impacted retail sales for Tata Motors in recent years, and brought the company’s market share in the passenger car segment down to only a mid-single digit percent. In order to reverse this trend, the company announced Horizonext in 2013, an aggressive strategic plan for its passenger vehicle business unit. According to this strategy, the main focus for Tata is to improve customer satisfaction, especially the after-sales services. The company, in particular, has looked to make inroads in the hatchback and compact car segments, which are the high volume and fastest growing vehicle segments in India.

Tata’s Compact Sedan Zest Outsells Honda Amaze

The compact car segment forms more than 30% of all passenger car sales in India. According to the Ford India President, compact car sales are expected to double by 2018 from around one million units in 2013. ^[2] This surge in demand in expected to be fueled by rising disposable incomes in the second most populous country in the world, and also owing to the increasing demand for fuel-efficient smaller cars due to rising fuel prices. Earlier this year, Tata launched a new sub 4-meter compact sedan, the Zest, in the country. In the last two months, unit sales of the Zest have overtaken sales of the Honda Amaze, catapulting Zest into the third place behind Maruti’s Dzire and Hyundai Xcent in the compact sedan segment in India. Tata Zest constituted 37% of all Tata passenger car volume sales in the country in the last two months, selling 7,359 units.

Riding on the initial success of the Zest, Tata’s domestic passenger car volumes could improve going forward. Zest is the cheapest car in its category, and the model comes with technical features in its base variant that are offered only in the higher variants of its competitors. This could give an edge to Tata’s compact sedan and boost volumes for the company. In addition, the company has started online booking of the Bolt, a new hatchback, to boost its presence in the small-sized car segment, which forms a bulk of the vehicle sales in India.

The company’s compact car brand Indica has suffered due to higher acceptance in fleet, whereas the small-city car Nano carries a “poor man’s car” perception. Hurt by the loss in share in the fast growing compact segment, Honda overtook Tata as the third largest passenger car company in India last year, behind Maruti and Hyundai. With the introduction of the Zest and Bolt, Tata will look to compete with Maruti, Hyundai, and Honda in the domestic compact car segment.

Passenger Vehicle Market In India Expected To Grow

India is the world’s seventh largest passenger vehicle market, and was previously estimated to top Germany, Brazil, and Russia to gain three places in the global rankings by 2015. ^[3] While Germany struggled from the impacts of the double-dip recession and is slowly rebounding, the Russian economy is weaker this year due to ongoing geopolitical tensions with Ukraine, and Brazil is witnessing lower vehicle volumes due to higher interest rates, inflation, and negative consumer sentiment. However, despite anticipated tepid volume-growths in these three countries, India’s bid to enter the top-four-passenger-vehicle-markets bracket in the next couple of years looked weak, due to lower than expected economic growth, causing only modest gains in the country’s automotive industry.

A stable government at the center and positive consumer sentiment has boosted this rebound in declining trends in passenger vehicle sales in India. In the interim budget 2014-2015, excise duty on small cars was decreased to 8% from 12%, incentivizing the purchase of vehicles. In addition, excise duty was reduced to 24% from 30% on sports utility vehicles, 24% from 27% on large cars, and 20% from 24% on mid-sized cars. Penetration of vehicles in India is still very low at around 18 per 1,000 individuals. India’s economy grew by 5.3% in the last quarter, after a 5.7% growth in the quarter before that, and with increasing disposable incomes, vehicle sales could continue to rise in the country.

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1. Auto sales in India [↩]
2. Auto Expo 2014, ibnlive.in.com [↩]
3. Passenger vehicle sales [↩]