Muted demand in developed markets may weigh on Tata Motors volume growth

ET Intelligence Group: For the greater part of the past two years, Tata Motors traded at a 40 per cent premium to BMW and Daimler, with Jaguar Land Rover (JLR) often doing well in several luxury markets. That premium has now disappeared, with greater global emphasis on the electric powertrain and cleaner internal combustion engines biting even the most refined of carmakers.

Although Tata Motors sells cars and trucks locally, the UK subsidiary JLR accounts for nearly 80-85 per cent of the company’s total fair value, and 80 per cent of revenues. In the March quarter, retail volume dropped 6.8 per cent to 1.72 lakh units and wholesale volume rose 2 per cent to 1.62 lakh units. For the full year, wholesale volume grew 2 per cent to 5.45 lakh units, with incremental sales from five models supporting overall performance. Barring China, all of JLR’s primary markets such as the UK, the US and Europe are not witnessing encouraging volume growth.

The UK, US and Europe accounted for twothirds of total volumes in the March quarter: Unit sales fell 21 per cent in the UK and 11.7 per cent in Europe, and rose 3.5 per cent in the US.

Given the muted underlying demand in developed markets, volume growth is likely to soften for the current fiscal year despite the fact that it will launch I-Pace — the first electric vehicle from JLR — in 2018. The Street has priced 4 per cent and 7 per cent volume growths in the current and next fiscal years, respectively.

On the margin front, the situation does not seem very encouraging. JLR’s EBIT margin dropped 340 basis points to 5.5 per cent in the March quarter from 8.8 per cent a year before. Margins are under pressure due to continued incentives in several markets and higher amortisation. The company has guided for the EBIT margin in the range of 4-7 per cent between FY19 and FY21.

For the long term, the company lowered its EBIT margin guidance to 7-9 per cent from 8-10 per cent earlier. Although JLR took an early lead with the development of I-Pace, it needs to continue to invest in new models and technology to match rising spends at peers. According to CLSA, JLR’s spending on capex plus R&D in FY17 stood at 14.1 per cent. JLR will spend £4.5 bn on new products, technology and capacity in FY19.

Interestingly, after several quarters, the domestic business has contributed positively to the consolidated operating margins because of higher profitability and cost efficiencies. Analysts peg the value of domestic operations at Rs 70-80 per share by ascribing EV/ EBITDA multiple of seven times, a valuation level that appears sharply discounted when compared with Ashok Leyland.