Tata Motors: China worries persist

But valuations turn attractive after a 40% fall over 6 months

For two sessions in a row, the Tata Motors' stock ended in the green, gaining eight per cent as China cut interest rates, reduced bank reserve ratio requirement (RRR) and announced a further 300-basis-point RRR cut for financial-leasing and automobile-leasing companies. But, analysts say rate cuts will not boost sales of luxury cars, which JLR sells. Rate cuts could boost mass-market cars, however. The Tata Motors' stock ended 0.6 per cent down on Thursday, even as the Sensex gained 516 points.

Concerns over a slowdown in China, a key market for JLR, as well as a slow pickup in Tata Motors' Indian business, saw its stock lose over 40 per cent over the past six months. The yuan depreciation has added to the negatives, given the company will have to absorb some of the hit on costlier imports into China.

From a peak of 25 to 30 per cent contribution to JLR's volumes, China's contribution has come down to 16 per cent in the quarter ended June. While its other key markets - the UK, Europe and North America - have seen sales growth of 14 to 19 per cent this year, sales in China are down 28 per cent. In July, China sales were down 37 per cent year-on-year. The company has attributed the fall to changing market conditions, production ramp-up for the locally-produced Range Rover Evoque, and run-out of other vehicles ahead of coming launches.

Pricing of cars in China is higher than rest of the markets. The decision to set up a joint venture in China and make cars there saves costs and offsets import duties. The commodities crash has added to woes. The crash has led to a slowdown in markets such as Russia and Brazil. While the Chinese economy is key, the company will be hoping for a pickup in global sales, as new product launches gain traction, as it phases out some older models, and as it raises production at its China JV. Positively, the India business is expected to grow strongly, led by a pickup in medium and heavy commercial vehicles, but India accounts for only 18 per cent of Tata Motors' consolidated revenues.

China uncertainty continues. Analysts at Barclays say valuations seem very bearish, as most concerns look priced in. The Street, according to the research firm, is implying that China profits will go to zero, with no value attributed to the joint venture. About 90 per cent of the analysts tracking the stock (trading at eight to nine times FY17 earnings) have a buy rating, with a target price of Rs 517, compared to the current price of Rs 335.