Tata Motors: Boost from strong JLR volumes

Analysts expect JLR to maintain double digit volume growth on launches, refreshes

The Tata Motors scrip jumped 10 per cent on Tuesday to touch a 52-week high after UK subsidiary JLR (Jaguar Land Rover) reported record sales for August. The stock also got a boost after the company announced plans for a new platform for its Jaguar cars at the Frankfurt Motor Show on Monday. The reduction in discounts on JLR models also added to the positive news flow, as this indicated strong demand and could lead to improving realisations.

For most brokerages, Tata Motors remains their top choice in the Indian automobiles sector, as the company continues to power ahead on the back of strong JLR sales while Indian players (including Tata Motors) are struggling with a steady decline in sales volumes. Jatin Chawla and Akshay Saxena of Credit Suisse, who have an outperform rating, say with volumes expected to grow in double digits over the next five years, there is a case for a re-rating. The analysts say the company, which achieved volumes of 373,000 in FY13 can hit 600,000 units by FY17 and generate free cashflow in excess of £1 billion. They have a target price of Rs 400 for the stock, which, at Rs 349, is trading at seven times its FY15 estimated consolidated earnings.

The biggest trigger for the stock on Tuesday has been the strong sales in the key developed markets of Europe (including the UK) and the US that account for 53 per cent of JLR sales. While sales in the US were up 40 per cent, those for the UK were up 36 per cent on a year ago. In the US, the company outperformed its bigger rivals Audi and Mercedes, which grew 15-21 per cent. The sales also rose in China, one of its star performers, recording a growth of 43 per cent year-on-year in volumes. Sales boost was largely led by Jaguar brands XJ and XF, while Evoque and Freelander were the top performers for Land Rover. Calendar year-to-date, JLR has seen their sales jump 12 per cent to 220,000.

Given the strong performance, reflecting better demand, HSBC's Yogesh Aggarwal continues to remain positive on growth for JLR, owing to a robust pipeline of launches and a better outlook for the premium SUV market. He also adds incentives for JLR and European premium peers decline sequentially, indicative of improvement in demand environment

Another trigger cited by analysts for Tuesday's performance has been the launch of advanced aluminium architecture which will form the basis for range of new Jaguars. The company is reportedly going to spend $2 billion to develop this product and set up a new plant. The company showcased the C-X17 Sports Crossover Concept, to be based on the new design. "While it will take a couple of years for the product to move from concept to the retail level, this could be the next trigger," says an auto analyst with a foreign brokerage house. The company is looking at launching the mini Jaguar over the next year and a half as it seeks to go down the value chain. Lower premium car segment comprise half the luxury car pie.

On the whole, with JLR sales remaining robust, Tata Motors performance should also look up. Additional gains would come from a weak rupee, offsetting most of the pressures seen in the domestic business.