China impact on Tata Motors already accounted for

90 per cent of the 50 analysts covering the stock offer 34 per cent upside

After losing 14 per cent since the start of 2016 on worries related to China demand and yuan devaluation, Tata Motors recovered a bit, gaining three per cent to close at Rs 353 on Friday. Brokerages say the concerns related to China are overblown on both pricing, as the company starts to localize its production, and currency.

While China accounts for less than a quarter of volumes and revenues, given the higher margins of the products sold, its share of Jaguar Land Rover operating profits are expected to be upwards of 40 per cent in current fiscal, according to Kotak Securities. Analysts at the brokerage house say every five per cent depreciation in the yuan will impact JLR’s Ebitda by only 3 per cent. Of the nearly 100,000 vehicles JLR is expected to sell in China in the current fiscal, only two thirds are expected to be imported from the UK.

In addition to increased localisation, what could limit the currency impact is platform consolidation and economies of scale. The volume contribution from the manufacturing joint venture in China is expected to increase from four per cent in FY15 to over 50 per cent in FY18, helping the company improve competitiveness. Volumes in China were down 24 per cent year-on-year in 2015 and have been the biggest overhang on the Tata Motors stock, as the UK-based subsidiary accounts for nearly all the net profits at a consolidated level. The company has attributed the fall in China sales to weak demand, model restructuring and on industrial explosion at Tianjin port. However, on a sequential basis, China sales in December were up 25 per cent over November, crossing the 10,000 mark after 10 months.

What has helped in keeping the volume momentum high is the uptick in US and UK sales. For example, December sales in the US were up 30 per cent year-on-year, while sales for 2015 were up 26 per cent.

The other driver for the stock could be higher truck and passenger vehicle sales in India, on the back of new launches. Medium and commercial vehicle sales in the current fiscal were up 22 per cent, while passenger vehicle sales were up by five per cent. Indian business accounts for less than 20 per cent of the target price arrived at by Tata Motors, using a sum-of-parts valuation. Nearly 90 per cent of the 50 analysts covering the stock have a ‘buy rating’ on it with a target price of Rs 473, offering a 34 per cent upside from current levels.