Lower China Sales And Large Investments To Weigh On Tata Motors’ Fiscal 2015 Results

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The Indian automaker Tata Motors (NYSE:TTM) is scheduled to announce its Q4 and full fiscal year (ended March) results on May 26. The company reported a mixed bag of results last quarter, with revenues rising 9.6% year-over-year, while profits before tax declined 6.4%. [1] The Indian automaker’s stock price fell 5.3% after the announcement of its third quarter and nine-months ended results on February 5, and the stock is down 20% since. This is happening while the India passenger car business is finally taking off, and growth for the luxury brands Jaguar Land Rover (JLR) has somewhat stalled. JLR forms over 90% of the valuation for Tata Motors, as per our estimates, and while wholesale shipments for the British marquee brands rose by double-digit percentages in the last five fiscals, shipment growth is expected to have contracted this fiscal year.

Trefis’ price estimate for Tata Motors is $48, which is above the current market price.

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The top line growth through the nine months ended December 2014 was boosted by higher wholesale shipments for JLR. Rich product and market mix for JLR saw revenues rise 10.3% over 2013 levels, with strong sales for the Range Rover Sport and the Jaguar F-Type. However, while wholesale shipments for JLR rose in the October-December period to bolster top line growth for the division, retail sales to end customers fell 0.6% year-over-year, following an 8% rise in retail sales in the previous quarter. [2] The automaker might have looked to keep supply in line with demand, and eased-off shipping vehicles this quarter, in order to avoid inventory pile-up and protect its premium brand image. Retail sales fell 0.4% in the January-March quarter, and in turn, wholesale shipments could be lower in Q4, dragging down revenue growth. Large start-up costs related to product launches, and higher R&D expenses and CapEx are expected to dent Tata’s financials in the near term, and the company could be cash flow negative in the next fiscal, starting April 2015.

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China Sales Lag, While U.S. Sales Pick Up For Jaguar And Land Rover

China is JLR’s single largest market, forming over 25% of the net retail volumes in fiscal 2015. Economic conditions have become weaker in the country, over previously seen high GDP growth levels, due to industry overcapacity, and real estate and infrastructure sector slowdowns. However, the GDP growth for the country is expected to be 7% this year, which is still solid. Sales of passenger vehicles surged 9.9% year-over-year in 2014 to 19.7 million units in China, and retail sales for JLR surged 28% year-over-year in the country during this period. However, since then, demand for the British luxury vehicle brand has been tepid in the country, with volumes down more than 20% in the January-March quarter.

Jaguar Land Rover is rolling-out its locally built Range Rover Evoque in China this fiscal year, but is facing some trouble scaling-up its output. Sales in China might have dropped this year mainly as the Chinese customers decided to wait for the locally-built cheaper JLR models, or it might be due to the measures taken by the government to make domestic automakers more attractive, such as encouraging parallel imports of premium vehicles and gray-market vehicles, not authorized by the automakers, which are sold below the official market price. [3]

Luxury foreign automakers came under the scrutiny of, and were later fined by, China’s antitrust regulator last year, as many were found guilty of monopolistic practices pertaining to highly inflated vehicle and spare part prices. Foreign automakers tend to mark-up their model prices in China, to account for taxes and costs of transportation and assembly, but still earn a hefty margin on sales in the country. Domestic automakers are taking away share from foreign makers in China in the last few months, mainly due to the surge in demand for budget SUVs. In this case, local production might be the answer for JLR. 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.

On the other hand, after retail sales declining 1% in North America in the nine months ended December, Jaguar Land Rover’s sales jumped 17% in the last quarter, on the back of a strong demand for the SUV brand Land Rover. Jaguar has struggled in the U.S. in the last few months, mainly as the demand for premium sedans has fallen, as potential premium vehicle customers are choosing SUVs and Crossovers over sedans. Luxury SUV growth in the U.S. light-duty vehicle market has outpaced the growth in any other automotive segment, registering a 30% rise in volume sales through April, over 2014 levels. This high demand for the more powerful and spacious SUVs has also propelled a 23% rise in Land Rover sales in the U.S. through April. In contrast, Jaguar registered a 6% drop in retail sales in the country.

High Investments In Model Makeovers And Capacity Additions To Hurt Margins

Jaguar Land Rover continues to accelerate investments in research and product development, and spent approximately £2.3 billion ($3.5 billion) through the first nine months of fiscal 2015 for this purpose. The British marquee car maker was earlier expecting capital expenses to range between £3.5-3.7 billion this fiscal, but lowered its full fiscal outlook to £3-3.2 billion ($4.6-4.9 billion). [4] Although lower than previously expected, JLR will still spend around 12.5-13.5% of its revenues on CapEx and product development, and expects the figure to range between £3.6-3.8 billion next fiscal. Large investments are likely to hurt JLR’s cash flow in the near term, but the company has around £4 billion of cash and cash equivalents and £1.5 billion of undrawn credit lines, which will support investment plans in the near future.

The decline in retail sales in the latter half of fiscal 2015 (October 2014-March 2015) can be attributed to product launch factors. Land Rover’s new Discovery Sport was launched in October last year, and sales for this model have consistently grown, forming 17% of the net Land Rover volumes in April. On the other hand, Jaguar retail sales fell 19% in Q4, after declining 3.5% in Q3, as sales for the sedan XK and XJ fell by double-digit percents. The company has accelerated investments for future growth, and will aim for higher retail sales going forward, especially in China. In particular, the compact sedan XE was launched in March, and is expected to be a volume model going forward.

2015 might just be a transitional year for Tata Motors  — for both JLR and the standalone business, and the company could be headed for growth in the mid to long term. Big talking points in the fiscal year to come include the impact of JLR’s locally-manufactured vehicles in China, and the impact of Jaguar’s first premium compact model in over five years, the XE.

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Notes:
  1. Tata Motors press release []
  2. Tata Motors vehicle volumes []
  3. China rethinks its car-sales model []
  4. Tata Motors earnings transcript []