Tata Motors’ Recovering Passenger Vehicle Form

Tata Motors‘ (NYSE:TTM) stock has jumped approximately 75% in the last 52 weeks, surpassing $50 a share last week, mainly on the back of its thriving luxury vehicle business. Jaguar Land Rover constitutes more than 95% of the company’s valuation, according to our estimates, due to higher average revenue per unit, fatter margins, and strengthening premium vehicle demand around the world. On the other hand, Tata’s own-branded passenger vehicles lineup, comprising the Nano, Indica, Vista, Indigo eCS, and the Manza has witnessed sequentially declining sales in India on poor customer perception, lack of new or refreshed products, and higher acceptance of Tata’s passenger vehicles in fleet, impacting retail buyers. The company’s passenger vehicle market share in India fell to 6.1% in fiscal 2014 (ending March) from 15.3% in 2010.

Negative consumer sentiment due to high inflation, unstable fuel prices, and high interest rates, hurt demand for automobiles in India in fiscal 2013-2014.  But since then, passenger car volumes are up 5% in the the first three quarters of fiscal 2015 (April-December), on lower energy prices, a stable government at the center, and the threat of excise cutback this year, which boosted December sales. Despite the rise in automotive demand so far this fiscal year, volume sales for Tata’s passenger car segment, which formed more than one-fifth of the net volumes for the standalone business last fiscal year, fell 8.6% in India through Q3. The automaker has relinquished more market share to competitors such as Maruti Suzuki, Hyundai, and Honda. However, with new model launches and a refreshed approach, Tata Motors is slowly but surely making a comeback in the passenger vehicle segment in India, and at a good time too, when the overall automotive demand is growing.

Trefis’ price estimate for Tata Motors is $44, which is around 10% below the current market price.

See Our Complete Analysis For Tata Motors

Demand For Passenger Vehicles On the Rise

Leading automakers posted double-digit volume growth rates in December alone, with Tata’s sales jumping a massive 52.3%. This growth signals rising automotive demand in India, helped by lower fuel prices and increasing disposable incomes. But a prominent factor that boosted December sales was an expected price hike this year, following the excise duty rollback, which persuaded customers to buy vehicles at the tail-end of 2014. In February last year, the excise duty was reduced by up to 6%, based on the segment of the car, to stoke growth in an ailing automotive market. With the excise duty benefit lapsing at the end of last year, increased model prices should have a negative impact of volume sales in India in the early part of this year. However, increasing disposable incomes, coupled with low oil prices and low expected interest rates, could offset the withdrawal of the excise duty concessional rate, keeping automotive demand high in the country. Car sales in India are estimated to rise by 5-10% this year, after declining for two consecutive years. In fact, by 2018, India is expected to become the third largest car market behind the U.S. and China, going by the current anticipated economic growth trends.

Could Tata Have A Piece Of The Pie?

Car sales are back on track in India, and also for Tata Motors it seems. Following the launch of the sub 4-meter compact sedan, Zest, in August last year, the automaker’s monthly car sales in the country rose in each successive month (over 2013 levels), after many consecutive months of decline. Zest and the newly launched hatchback Bolt are a part of the company’s Horizonext initiative, announced in 2013, which is an aggressive strategic plan for its passenger vehicle business unit to reverse the trend of flagging sales. Over the last two years, Tata also unveiled eight newly upgraded and enhanced products across five passenger vehicle brands and introduced new products such as the E-max range of CNG vehicles and the Nano Twist with electric power steering. The Indian automaker’s efforts to breathe life back into its passenger vehicle division might be finally paying off.

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. This segment remains popular as customers look to trade-up from two wheelers, especially when low fuel prices support higher purchasing power. Within three months of launch, unit sales for the Zest overtook sales of the Honda Amaze, catapulting the model into third place behind Maruti’s Dzire and Hyundai Xcent in the compact sedan segment in India. Tata has sold around 15,000 units of the Zest in the last three months and sold 852 units of the premium hatchback Bolt in December. ^[1]  Bolt competes with bestsellers such as Maruti Suzuki’s Swift and Hyundai’s Grand i10 and Elite i20, and Tata will hope to improve its volume sales this year on the back of these new launches. Just for reference, the market leader in premium hatchbacks, Maruti Suzuki Swift, sold over 200,000 units last year, double the net unit volumes sold by Tata’s passenger car division in India. ^[2]

The standalone business has posted losses in the last couple of years, owing to slacking volume sales and high start-up, research, and development costs undertaken by the company to reverse the trend of falling sales. Both Zest and Bolt are compact models, and as this segment forms a bulk of the passenger vehicle sales in India, Tata Motors will look to recover some of its lost share in this market.  In fact, the automaker aims to achieve a double-digit growth in vehicle sales in India in fiscal 2016 (ending March), faster than the anticipated growth in the overall automotive industry. ^[3]

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Zest sedan adds new zing to Tata Motors sales [↩]
2. Top selling hatchbacks in India [↩]
3. Tata Motors bet on Bolt to recharge growth plan [↩]