Tata Motors Earnings Review: Weak Product Mix And China Sales Slide Hit Jaguar Land Rover

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Tata Motors (NYSE:TTM) reported a 3% rise in its Q3 fiscal 2016 (ending March) revenue, but profit before tax dropped 27%, mainly hurt by slowing sales in China and a weaker sales mix. China, once the growth driver for Jaguar Land Rover (JLR), which forms over 90% of the company’s valuation as per our estimates, is witnessing slowing economic conditions, which also impacted the automotive market during the early part of 2015. However, demand picked up during the latter half of the year, to boost passenger vehicle sales by 7.3% year-over-year for 2015 in the country. But JLR’s sales still lagged in China, where the automaker started local production of Range Rover Evoque and Discovery Sport SUVs in November last year.

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The spurt in volume sales towards the end of the year, especially in Europe and North America, offset the decline in China, helping JLR end 2015 with a 5.3% year-over-year increase in net volume sales. In fact, JLR’s retail sales grew a solid 23% in Q3 (the October-December period). The great upshot in the brand’s volumes also comes at the back of a sustained high demand for SUVs, boosting sales for Land Rover, which forms over 80% of JLR’s net volume sales. 2015 has been the year of SUVs. Land Rover managed to record a solid 37% rise in volume sales in the U.S., where the passenger vehicle market for the year rose 5.8% to 17.5 million vehicles. In fact, Land Rover outpaced the growth seen by the light truck lineups of Mercedes-Benz, BMW, and Audi in the country. Luxury SUV volumes rose by a strong 17% in the country last year, while luxury car volumes fell 4.4%. [1] The sustained low oil prices, and the extra cash with customers, has further caused segment shifts to bigger, more spacious SUVs, which seems to have benefited Land Rover. On the other hand, Land Rover’s sales grew a strong 40% year-over-year in Europe in Q3, led by growth for the Defender and incremental sales from the Discovery Sport.

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Besides the large rise in the U.S., SUVs showed a massive 52.4% rise in China, as well, in 2015. [2] The market for luxury SUVs in China, in particular, is expected to double to 1.2 million units by 2020, further boosting growth prospects of Land Rover in the country. Just for reference, less than 200,000 units of luxury SUVs were sold in China in 2010. JLR’s volume sales slid by a substantial 24% in China in 2015, as the slow ramp up of locally-produced vehicles remained a headwind. The rate of decline, however, declined in Q3, with retails falling by 10%.

JLR’s volumes in China could improve going forward, since the demand is expected to remain strong. The shift in a service-driven economy from a manufacturing driven economy will see the rise of the upper-middle class. The number of upper-middle-class and affluent households is forecast to double to 100 million and comprise 30% of all urban households by 2020, compared with 17% presently, and only 7% in 2010. This should help boost sales of premium vehicles. Consumption of young-generation consumers (ages below 35) is growing at 14% annually, which is twice that of consumers older than 35. The newer generation also typically has a more sophisticated taste, and is more free-spending. The growth in the upper-middle class and the emergence of the new generation is expected to increase sales of high-value products, including automobiles. Jaguar will also launch its compact SUV F-Pace next year, which could boost unit sales for the British marquee car maker, seeing how the demand for SUVs and crossovers remains high.

What hurt JLR’s results this quarter, apart from slower China sales, was an unfavorable mix. The compact saloon XE has sold over 27,000 units since its launch in March last year, and as expected, as compacts sell in bulk, it is the highest selling model for Jaguar, constituting close to 50% of the net volumes in each of the last five months. The XE is Jaguar’s response to the likes of the Mercedes C-Class, Audi A3 and A4, and BMW 3-series — all of which are among the highest-selling models for their respective automakers. This has kept the volume growth positive, despite the run out of the Jaguar XK, and decline in sales of the XF and XJ, as customers are anticipating the launch of their upgraded models this year. However, due to its lower price points, the XE, and other compacts, are dilutive to the average revenue per vehicle and, in turn, margins.

Lower Losses For The India Business

Tata Motors managed to extract 10% year-over-year growth in revenue from its standalone business in Q3, and cut its losses compared to Q3 fiscal 2015 levels, on the back of a solid 15% sales growth for medium and heavy commercial vehicles. However, Tata’s India business is still not performing as positively as expected. The Indian automotive market is back in full swing, backed by a stable government at the center, strong GDP growth (estimated at 7.6% for fiscal 2016), and increasing disposable income. In fact, India has overtaken China as the fastest growing major economy in the world with 7.3% GDP growth in the quarter ended December. India’s passenger vehicle market is also the fastest growing, with sales rising over 9% year-over-year through April-December. [3]

However, Tata Motors seems to have run out of steam after sales of its passenger vehicles temporarily rose following the launch of its compact sedan Zest and hatchback Bolt. Zest and the 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. However, the Zest and Bolt, dubbed as the comeback vehicles for Tata Motors, have failed to revive sales as strongly as expected. Passenger car sales for Tata fell 9% in its Q3, despite the sustained large demand in the country.

A bright spot for the company, however, is a possible comeback in the light commercial vehicle (LCV) segment. Although this segment of Tata’s suffered a 10% decline in retail sales in India in Q3, December and January retail growth has come in positive. LCVs form over one-third the net domestic volumes for the automaker, and thus, the continual decline in this segment is weighing on the overall volume performance, despite a strong growth in medium and heavy commercial vehicle volumes. Much of the weakness in LCVs was associated with the low demand. Industry-wide sales declined by 7.4% through April-September, as demand for these vehicles used for intra-city transport remained tepid. However, as was anticipated, LCV demand picked up in Q3, to reduce the overall decline in this segment to 3.5% through the first three quarters of this fiscal in India. The uptick in the infrastructure sector had caused a rapid rise in early 2015 in sales of M&HCVs, which are used for inter-city transport. Once goods arrive at certain key hubs through trucks, they are transported to surrounding areas in LCVs. The growth in M&HCVs was expected to trickle down to the LCV segment.

Tata Motors’s India sales still remain subdued, as for JLR, which is hoping for a China comeback. In fact, China sales growth is back to positive for JLR, with Land Rover’s January sales rising 9% in the country. Q4 results could come in more positive for the company, with a rebound in JLR’s China sales.

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Notes:
  1. Auto sales, wsj.com []
  2. passenger vehicle stats, caam.org []
  3. Motorcycle sales remain an area of concern, siamindia.com []