Tata Motors in high gear

With improving demand in China and steady US sales, JLR volumes are expected to grow in double digits; new launches to help India biz

The Tata Motors stock was up eight per cent over the past week, on expectation that higher global Jaguar Land Rover (JLR) sales, as well as positive China economic indicators, would boost volumes.

Further, the company at a consolidated level is less impacted than its peers due to demonetisation. In this backdrop of healthy growth prospects, investors could expect more gains from the scrip.

JLR’s global sales were up two per cent year-on-year in November. This was led by a 42 per cent jump in China and a 19 per cent increase in the US, offset by decline in UK and Europe volumes. Also, sales of more profitable Jaguar vehicles were higher. Jaguar volumes increased 83 per cent, led by the new F-Pace and XF variants.

For the first 11 months of this calendar year, the company sold 527,000 units, up 21 per cent over the year-ago period.

For FY17, analysts expect JLR sales to grow by 70 per cent and overall sales by 16 per cent. Analysts at Kotak Institutional Equities expect volume growth at JLR to pick up over the next two to three months, led by continued strong growth in China and launch of the new Discovery in the March quarter. JLR’s annual volume growth is expected to be 10 per cent over FY16-19.

More, JLR’s operating profit margin is expected to improve in the second half of 2016-17 in 2017-18. Led by currency benefits, operating leverage and benefits from platform consolidation, says a Kotak Securities report. Bloomberg analysts believe the margins will improve on the back of production rampup of the Land Rover SUV by the Chery joint venture in China. A weak British pound could boost translated revenues from foreign sales, they add. Both revenues and margins, however, would depend on how China performs.

What helped China sales in November was ramp-up in local production and improving demand. With China’s Producer Price Index (PPI) hitting its highest level in five years, demand could see an uptick. This, coupled with better than expected numbers from the manufacturing Purchasing Managers’ Index (large state owned factories), as well as the Caixin manufacturing PMI (mid-sized companies) in November, indicate the Chinese economy is stabilising. Analysts expect China’s share of overall volumes, down from 25 per cent in FY15 to 18.1 per cent in FY16, to improve to 21 per cent in FY18.

Strong growth prospects in the US, the other key market, also bodes well for the company, as it accounts for about a fifth of JLR’s global sales. The company did better than US peers such as BMW, Audi and Mercedes in November. Analysts believe there could be some positive impact on the company from Donald Trump’s choice of pro-industry Scott Pruitt to head the US Environment Protection Agency. JLR is expected to benefit the most if the Trump administration scales back fuel economy standards in the country.

On valuations, analysts at Morgan Stanley say the company, adjusted for spending on research and development, trades at a price to earnings ratio of eight times its FY18 estimates, a five per cent discount to peers. The key positive, say analysts, will be a turnaround in the Indian passenger car business on the back of new launches -the Hexa (SUV) next month, Kite (compact sedan) in mid-2017 and Nexon (compact SUV) by the end of 2017.

Morgan Stanley expects the company’s passenger vehicle market share to improve from 4.5 per cent in FY16 to 7.3 per cent by FY19. Commercial vehicle sales are expected to look up, too, given strong agricultural production and pick-up in mining and road construction activity, though some near-term impact due to demonetisation is not ruled out.