JLR's missteps in China hurt volumes: Analysts

Localisation efforts in China backfire; dealers sceptical about Jaguar's new launches

Tata Motors is suffering from what is known as the ‘falling knife’ syndrome in stock market parlance. The stock has fallen 15.4 per cent over the past month and nearly 40 per cent from this year's high. The stock tends to react sharply on any news on China, as the country accounts for 35 per cent of Jaguar Land Rover worldwide sales. Even though consensus view on the stock remains positive, investor sentiment has turned negative.

So far, investors have been very optimistic about JLR's prospects even though sales growth has disappointed. But the recent slide in the stock is more to do with more fundamental issues facing JLR in China than a mere stock market meltdown.

The biggest reason for the bearish sentiment around the stock is that the company's localisation efforts in China have back-fired. In China, JLR is faced with three key risks. For starters, the brand perception around Evoque has deteriorated after the launch of the localised version of the car. Second, Jaguar's XF is not likely to fare as well as estimated earlier, as Land Rover is a more popular brand in China. Analysts with leading brokerages expect the Jaguar volumes to decline 20 per cent in FY16 and Jag XE will add only 20,000 units globally in FY16 and 50,000 units in FY17. Finally, margins are also expected to crack in FY16 and fall to 14.5 per cent levels from 19 per cent at present, as discounts have increased.

Phillip Capital says: “...The sharp drop in China sales has more to do with JLR’s missteps in terms of phasing old products and inapt pricing strategies for Evoque.” The company delayed the launch of the localised Evoque by six months, which led to dealers selling the imported Evoque at a 25 per cent discount. When the company launched the localised Evoque at a 20 per cent discount, customers felt they were being taken for a ride. Also, some issues with the gear box in Evoque have further affected brand salience.

Analysts have spoken to luxury dealers across China and the understanding is that luxury car market has been hit by a crackdown on corruption and not the stock market collapse. The current stock price suggests the market is discounting the success of the Jag XE, which has received pre-launch orders of 25,000. The market's strong reaction to Tata Motors suggests the models might not fare as well as expected at the start of the year. With China looking unsteady, the stock is likely to remain volatile.