Tata Motors
Rating: Overweight
Overall luxury car market growth in China has slowed down to 15% (past six months), from +25% earlier. However, the trends within the luxury market are disturbing. Within the overall market, the high-end market (imported cars) is seeing a sharp decline, while locally made cars are still growing +20%. JLR now imports 100% of its cars in China raising concerns over growth. We see the current trends not impacting JLR’s FY16/17 growth or earnings.
Firstly, the import market is down not just due to macro slowdown, but buyer temporary procrastination as well, in our view. With the imminent legalisation of parallel imports, customers are expecting lower prices for imported cars resulting in postponed buying. This should reverse in the next three-six months. Parallel imports are unlikely to materially impact RR (Range Rover) supply. Consequently, volume growth should recover soon. Additionally, Discovery-Sport should add to growth as well over Freelander.
Secondly, the lower end of luxury car market is growing strongly in China as the upper mass market upgrades to luxury. This is a positive setup before the launch of Jaguar XE and local production of Evoque. Even if the pricing environment moderates (likely), it will be offset by the GBP weakness.
Western markets stable: JLR has lost some share in the US and European market as it gets ready for launch of Discovery Sport and XE. We see continued market share gains for JLR in 2015 and 2016.
Don’t ignore the domestic business: Domestic business should report a loss of nearly R13/share in FY15 vs the total consolidated EPS of R57.
Over the next two years, whenever the business breaks-even, that itself should add 20% to the consolidated earnings.
—HSBC