Auto skids; Tata Motors drops on JLR's China sales worries

Analysts say China contributes nearly 40% of JLR's operating profit

Shares of most auto companies tanked on Thursday, driven by Tata Motors, which fell 4.2 per cent on worries that China’s new stringent fuel economy norms might affect the company’s Jaguar Land Rover (JLR) unit. China contributes nearly 40 per cent of JLR’s operating profit, analysts said.

BSE’s auto index fell 2.23 per cent, while the Sensex declined about 0.5 per cent on Thursday. The shares of Bajaj Auto, India’s biggest two-wheeler exporter, fell 4.6 per cent on worries the political tension between India and Sri Lanka could affect the company’s business there.

Maruti Suzuki fell 2.5 per cent, Hero Honda declined 1.8 per cent while Mahindra & Mahindra was up 0.6 per cent.

Fund managers and analysts said investors are increasingly wary about the sector’s prospects, as sales are likely to be squeezed with the economy slowing down.

“People are cutting on discretionary spending. Few are hurrying up to make auto purchases at this juncture,” said Anand Shah, chief investment officer, BNP Paribas Asset Management. “Also, margins for companies will be under pressure due to the competitive environment.”

Bank of America Merrill Lynch (BofA-ML), in a report, said, “Investors were most concerned about the demand environment.” Among Indian automakers, investors were positive in Tata Motors because of its global business, it said.

IDFC Securities, while reiterating its underperformer rating on Tata Motors with a price target of Rs 254, said the valuation premium of the stock was ‘unjustified’. The stock closed at Rs 273.75 on Thursday.

“Investor fervour around JLR’s new launches seems justifiable with Tata Motors’ increasing dependence on JLR. However, we believe the Street is ignoring the aggressive line-up by competition (34 products vs JLR’s 10 in four years). For JLR, sustaining the volume growth and incremental market share gains will be an uphill task,” said IDFC.