Tata Motors shares outpace Mahindra & Mahindra as JLR sales rise

MUMBAI: Shares of Tata Motors have outpaced the company's domestic rival Mahindra & Mahindra (M&M) in the past three months, helped by rising sales of Jaguar Land Rover and lower tractor sales at M&M due to a slowdown in rural markets.

Tata Motors shares have risen 57% in the past three months compared with a 1.14% fall for M&M. The rise has helped Tata consolidate its lead as India's most valuable auto company with a market cap of 88,500 crore. M&M, in comparison, has a market cap of 41,520 crore.

Sales of Jaguar cars and Land Rover SUVs have risen in the past few months due to new models and expansion into Asian markets such as India and China. JLR sales have jumped 27% in the three months ended February. At the same time, lower farm incomes due to falling prices have strangled rural demand, forcing people to put off purchases of tractors.

M&M derives 40% of its growth from tractors. "Fundamentally, we continue to like Tata Motors, given multiple company specific positives over the next 12-24 months. However, any reversal in global sentiment is the key near-term risk in the stock," said Abhijeet Naik of CLSA.

About 54 brokers tracking the Tata Motors stock have raised the target price by an average 38% to 288 in the past six months, while M&M's price has been cut by about 6% to 797 by about 56 brokers. "From a short-term perspective, we prefer Tata Motors over M&M," said Yaresh Kothari, auto analyst at Angel Broking.

"While M&M's auto segment volume momentum is likely to sustain, the tractor segment is witnessing a slowdown. Further, lackluster growth in other key business segments may lead to muted consolidated performance," a recent note by Standard Chartered Bank said.

In the first seven months of FY12, M&M's tractor volumes rose by around 25%. In the past four months, however, volumes have dipped 7%. On Friday, the company said that it is stopping production for two days a week in March at its tractor plants at Rudrapur, Nagpur and Jaipur to cut costs. "We believe tractor volume growth will remain under pressure in the next few months but expect a slight improvement in demand once the Rabi crop is sold in the markets and the government steps up efforts to increase agricultural lending," says Hitesh Goel of Kotak Securities.

Ashvin Shetty of Ambit Capital said, "We continue to maintain that Jaguar Land Rover volumes will continue to be robust on the back of strong demand from emerging markets such as China and the recently launched Range Rover Evoque."

But the fortunes of both the companies could be tested severely in the coming months if the rural slowdown extends to sales of trucks and cars and if the Union Budget imposes higher tax on diesel cars on March 16.

"While about 23% of Tata Motors' standalone volumes would be adversely hit by a diesel tax, the overall impact on consolidated performance would be negligible. On the other side, with the imposition of a diesel tax, M&M would increase the price of a UV by up to 15%, which could put our 11% volume growth estimate for FY13 at risk," according to a recent note by Motilal Oswal.