Tata Motors: China slowdown a concern

Launch of Jaguar XE and SUV might help grow volumes in China

Tata Motors shares are down 28 per cent after a high of Rs 599 in January, as investors remain concerned about its China volumes. While a 56 per cent fall in earnings in the March quarter came as a shock, Jaguar Land Rover (JLR) sales in China have been another cause of concern.

Between January and May, JLR volumes declined 23 per cent year-on-year, as demand for the Evoque faces issues after the company localised production. Though JLR cut prices of the locally-produced Evoque by 15 per cent in China, as it saved 25 per cent on import duties, sales have been affected.

Evoque is the star in JLR’s portfolio and its volumes grew five times in the past three years. While analysts have cut earnings estimates on weakness in China volumes, they continue to be positively inclined towards the stock, as JLR is not only slated to launch new products this year but is expanding its reach in West and North China.

The launch of Evoque helped JLR increase its footprint in the luxury market from 33 per cent to 48 per cent. Kotak Institutional Equities says JLR has gained 370 basis points market-share in  three years, led by the launch of the new Range Rover, Range Rover Sport and a refresh of the Freelander.

Deutsche Bank Markets Research believes the launch of the XE (3-series/C-class segment) will enable JLR to address 70 per cent of the global luxury market, compared with 48 per cent earlier, which could again lead to market-share gains. Launch of the Jaguar XE by December and the Jaguar SUV will expand product range and brand appeal.

Analysts are looking for new models and wider presence of JLR across China. The country has a cap on vehicle registration in most big cities. By localising production, JLR will be able to address a larger part of the luxury market in China. Currently, localisation is expected to hit 30 per cent by the end of the financial year.



JLR is not alone in its localisation drive. The top four luxury players are planning to double production capacities in China over the next three years. Analysts believe companies with a younger product pipeline will fare better than others. Mercedes, for example, has grown volumes by 16 per cent year-to-date with its younger model line-up.

BMW has seen volumes grow three per cent and Audi by four per cent. The biggest risk to Tata Motors is the possibility of any of these products failing in China or a secular demand slowdown there.