Why Investor Confidence In Tata Motors Continues To Be Weak Despite A Brighter Outlook For FY2019

by Trefis Team
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Tata Motors’ (NYSE: TTM) stock price has slumped since the beginning of the current fiscal year and continues to tumble with the recently released disappointing quarterly results and the latest developments in the U.S. with respect to the imposition of tariffs on imported automobiles in the country. Although Tata Motors’ home brand, Tata Motors Limited (TML) has displayed substantial strength recently, its Jaguar Land Rover (JLR) division which contributes more than 90% to the company’s total value (according to Trefis estimates), and close to 80% to its revenue, has remained weak due to unfavorable market conditions in the U.K. and EU. This has led to investors losing confidence in the company’s stock and has thus resulted in its stock price slumping by 64% since the beginning of the current year.

Why Is Diesel Car Demand Dampening In U.K. And EU?

Tata’s JLR division’s sales volume has increased at a much slower pace in FY 2017-2018 as a consequence of the Volkswagen diesel scandal which occurred in 2015. Regulatory authorities across U.K. and Europe which are JLR’s key markets are imposing additional restrictions on the usage of diesel vehicles as they strive for a cleaner environment. The U.K. government has increased the imposed taxes on diesel vehicles, whereas the EU has imposed more stringent emission targets which would be effective post-2021. On the backdrop of such an unfavorable market environment, consumer confidence on diesel vehicles has deteriorated across U.K. and EU and have thus reduced their demand for diesel automobiles. Sales of diesel vehicles in Europe declined by 8% in 2017 and U.K. diesel sales have already declined by 32% in the first four months of 2018.

How Is It Impacting JLR?

JLR has a diesel dominated portfolio and hence the change in consumer perspective about diesel vehicles has consequently impacted the demand for JLR automobiles as well. JLR’s retail sales in 2018 grew marginally by 1.7%. This compares to a retail growth of 13% experienced a year ago. This decline was predominantly led by a 13% retail sales slump experienced in U.K. and a 5% decline in sales experienced in Europe.

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In addition to declining volumes, the company’s value has experienced a far larger value impact from its  declining margins in 2018. Margins declined in FY18 as a result of increased incentive offerings by the company in several of its key markets, in an effort to enhance its sales volume. JLR’s operating margins in FY18 declined by 170 basis points (bps) compared to the same period last year. This has negatively weighed on the Tata’s overall consolidated margins as well. The pressure on margins is likely to continue as the company continues to invest in newer models and technologies to match the rising spends incorporated by its peer companies. Consequently, Tata Motors downgraded its long-term EBIT margin to the range of 7%-9% in its latest quarter results from its initial guidance of 8%-10% announced a quarter ago.

Looking ahead, JLR’s recently released luxury electric variant, I-Pace, is expected to support the company’s declining sales of other variants to a certain extent in the upcoming fiscal year. Additionally, a brighter outlook for China is also expected to enhance the company’s total sales volume. However, despite the comparative stronger sales expected in 2019, the pressure on margins is expected to continue and weigh on the company’s stock price in the near term.

 

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