Tata Motors: Short term worries, but outlook strong

The Tata Motors stock fell two per cent in trade on Wednesday, on worry about a fall in car sales of its Europe-based subsidiary, Jaguar Land Rover (JLR). Sales for JLR are down six per cent year-on-year, largely due to phasing out of the Range Rover Freelander (to be replaced by the Discovery Sport) and no exports of the Evoque to China as the company starts to manufacture the model locally.

However, excluding these two, sales were up six per cent for the month. Adjustments in the production line for changing models have influenced JLR sales in the past two months. While the share of China in the overall JLR volume pie was down to 19 per cent in February from 27 per cent year-to-date, on local manufacture and an unfavourable base, analysts expect it to gradually increase again. IDBI Capital analysts say the benefit of local production in that country will help the company be competitive in case of a slowdown.

Though sales in other regions are a worry, retail volumes in the US for February at 6,327 (up 14 per cent over last year) was at a multi-year high. The growth was driven by the Range Rover portfolio, which accounted for nearly 5,000 units, the Sport and Evoque models recording good growth.

Despite slow ramp-up (JLR sales are up about six per cent year-to-date, to about 400,000 units), analysts say volume recovery assumption for JLR is intact. They are expecting double-digit growth for JLR in FY16. JPMorgan analysts are overweight on the stock, given the aggressive product and capacity rollout programmes, with new launches that include the Discovery Sport and Jaguar XE.

The India business continues to improve, led by medium and heavy commercial vehicles (M&HCVs) and car sales, which grew 30-33 per cent in February, pushing overall growth in the month to 11 per cent. Truck sales over the past six months have done well due to falling diesel prices and increasing freight rates. Diesel prices account for about half the operating cost for transport companies and the steep drop in prices is expected to improve their profitability. Truck operators have started to replace their older fleet, postponed during the earlier downturn, to meet the demand uptick.

The bus segment, too, got a boost recently. The company announced it had got an order to supply 4,000 buses to various state transport authorities as part of the urban renewal policy. M&HCVs have grown 15 per cent for the year-to-date and are expected to do so by 16 per cent for FY15 and 19 per cent for FY16.

Given the company's focus on reviving passenger car sales and the launch of the Zest in September 2014 and the Bolt in end-January 2015, sales of cars have seen a spurt in recent months, with the year-to-date numbers registering a 19 per cent increase. On the back of higher Zest sales (4,000 units a month) and those of the Bolt, car volumes are expected to grow a strong 21 per cent in FY15 and 23 per cent in FY16.

The two areas of concern on India sales have been the slower sales of light CVs and utility vehicles (UVs), tracking the sluggish sector sales. While lack of new products means UV sales (down 21 per cent year-to-date) will continue to be sluggish, light CVs (down 30 per cent over a year) are expected to recover. They generally lag the recovery of M&HCVs by two to three quarters.

With key segments recovering, analysts expect the domestic business to show strong revenue growth of 20-plus per cent (versus low single-digit growth in FY15) and break-even at the operating level for FY16 (loss in FY14 and FY15).

Given the better growth in JLR sales and improving domestic sales, nearly 90 per cent of the analysts covering the stock have a 'Buy' rating. Although India sales are expected to recover, 85 per cent of the one-year forward sum-of-the-parts valuation of Rs 635-650 is accounted by JLR. Any further weakness (current market price at Rs 560) should be an attractive entry point.