The Week That Was: Automotive Stocks

This week we review the new developments at Volkswagen AG (OTCMKTS:VLKAY) and Tata Motors (NYSE:TTM), particularly the ones that provide an insight into what 2015 holds for the two companies in terms of relatively unexplored vehicle segments. Volkswagen has looked committed to investing more and more in cleaner and low emission technologies to build electric vehicles, and the company has now teamed up with compatriot and chief competitor in the luxury space, BMW, to build battery charging stations in the U.S.  On the other hand, Tata’s passenger vehicle segment, which has for some time now witnessed declining sales in India, has launched its all new hatchback to compete in the compact car category, which forms a large proportion of sales in the country’s automotive market.

Volkswagen

The German automaker may have sold over 10 million vehicle units in 2014, but the company still lags the likes of GM, Ford, BMW, Nissan, and Tesla, in sales of electric vehicles. As the world pushes for cleaner technologies and environmentally-viable modes of transport with stricter emission standards, the demand for electrically-powered vehicles has rapidly increased. Although the percentage contribution of plug-in electric vehicles (PEVs) to the net global vehicle sales remains next to nothing at present, the PEV market is estimated to grow at a CAGR of almost 25% through 2023, outpacing the expected 2.6% annual growth for the overall light-duty vehicle market. The downside for EVs has been the absence of a well established battery-charging infrastructure, which has prevented customers from buying such vehicles. For Volkswagen, which launched its e-Golf, an all-electric car, in the U.S. at the tail-end of October, the problem amplifies as the electric range of its plug-ins is only around 70-90 miles. In contrast, the Tesla Model S can go 265-300 miles on a single charge.

We have a $44 price estimate for Volkswagen AG, which is roughly in line with the current market price. The stock has jumped 5.96% in the last week.

See Our Complete Analysis For Volkswagen AG

Volkswagen is now teaming up with BMW to build 100 direct current (DC) fast charging ports across the U.S. this year. The two companies are working with ChargePoint, a startup that already operates a network of card-operated chargers. The new charging stations will add to ChargePoint’s present network of 20,000 stations in North America. Tesla is also expanding its Supercharger network across the continent, but the stations only support a Tesla model. On the other hand, the new charging stations being built by the German automakers will support any vehicles with DC fast charging capabilities and those that use the SAE Combo connector, which is used in both Volkswagen and BMW EVs, among others. ^[1] The new Volkswagen-BMW collaboration will augment battery-charging facilities in the U.S., and as the new stations won’t be placed more than 50 miles apart, concerns regarding low electric ranges of EVs will also be addressed.

In the future, we could see both the companies extending their partnership to add more charging stations in the U.S. and possibly elsewhere. Volkswagen isn’t a big player at present in the electric vehicle market, which remains massively under-penetrated, but will hope to add incremental electric vehicle sales going forward, especially in the U.S., where the brand is struggling to sell more vehicles despite strengthening overall automotive demand in the country.

Tata Motors

Passenger car volumes are up 5% in the the first three quarters of fiscal 2015 (April-December) in India, on lower energy prices, a stable government at the center, and the threat of excise cutback this year, which boosted December sales. However, still struggling from a poor perception and lack of strong products in fast growing segments, Tata-branded passenger car volume sales in the country have slipped 8.6% in the country during the same period. ^[2] In order to reverse the trend of flagging sales, the company announced Horizonext in 2013, an aggressive strategic plan for its passenger vehicle business unit. Under this new initiative, Tata launched a new sub 4-meter compact sedan, the Zest, in the country late last year, and in just over two months, unit sales for the model overtook 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. Bolstered by sales of the Zest, Tata’s India passenger car sales jumped a massive 52.3% in December alone.

Trefis’ price estimate for Tata Motors is $44, which is around 9% below the current market price. The stock has jumped 13.41% in the last week.

See Our Complete Analysis For Tata Motors

Tata has now launched its second offering under the Horizonext initiative, the hatchback Bolt, which will compete with bestsellers such as Maruti Suzuki’s Swift and Hyundai’s Grand i10 and Elite i20. 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. ^[3] Riding on the expected rise in Bolt and Zest sales, and two new expected model launches this year, Tata Motors aims to achieve a double-digit growth in vehicle sales in India in fiscal 2016 (ending March). ^[4]

Tata Motors has suffered declining sales in India in the last couple of years, while the luxury division Jaguar Land Rover has raked-in cash. New launches, especially in high growth segments, could help Tata recover its sales in the domestic market this year and going forward.

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1. Striking Back Against Tesla, BMW And Volkswagen Team Up To Build 100 Fast Charging EV Stations [↩]
2. Tata Motors volumes [↩]
3. Auto Expo 2014, ibnlive.in.com [↩]
4. Tata Motors bet on Bolt to recharge growth plan [↩]