Tata Motors beats slowdown at home with Jaguar Land Rover volumes

fe Bureau Posted online: Thursday, Sep 26, 2013 at 0000 hrs
Mumbai : The strong performance of the Tata Motors stock has cushioned the sectoral index on auto companies. Even though the auto sector is considered to be directly affected by higher interest rates, the BSE auto index has fared better than other rate-sensitive indices in the last nine months. It has equalled the advances of the benchmark Sensex with year-to-date gains of 2.4%, thanks to heavyweight Tata Motors, which constitutes nearly 32.3% of the index.

The stock is one of the top 10 blue-chip gainers of the year as it rallied nearly 10% in the period. On September 20, 2013, it touched an all-time high of R354.9. On Friday, it added R6.4, or 1.9%, to close at R342.8. Some of the other auto majors, including Maruti Suzuki India, Mahindra & Mahindra Ltd and Bajaj Auto, have lost 6% to 8% in the year so far.

Amidst a dismal outlook for the domestic auto market, Tata Motor’s global sales have repeatedly pleased the Street given that almost 80% of the analysts hold a buy rating on the stock as per a Bloomberg compilation.

Although experts acknowledge the negative effect of the economic slowdown on the company’s domestic sales, specifically that of passenger car vehicles, they remain upbeat about the profitability of the company’s luxury car segment, Jaguar Land Rover. Not surprisingly, Tata Motors features as one of the top picks among the preferred stocks of many brokerages, including Goldman Sachs and CLSA, due to their inclination towards exporters against local demand stories and companies with higher pricing power.

In late August, Barclays upgraded Tata Motors to ‘overweight’ on expectations that JLR would maintain its lead on volume growth compared to its peers such as BMW and Audi due to its revamped product portfolio.

“While Tata Motors’ domestic business remains under stress due to macro concerns, we believe an improved performance from JLR should offset any drag from the standalone operations,” said the brokerage in a research note.

In the 2012-13 fiscal, nearly 76% of Tata Motors’ consolidated revenue came from operations outside of India. It witnessed strong growth of 24% in revenue from China, compared with 18% in the previous year, on the back of strong JLR sales. The division was responsible for nearly 88% of the company’s operating profit in the fiscal. The latest data shows that even in 2013, China contributed the bulk of JLR sales, which grew 15.4% y-o-y for the first eight months.

While experts remain upbeat on the prospects of the JLR business, some have started questioning further upside for the stock given a sharp rally of about 27% in the last three months.

Recently, Kotak Institutional Equities downgraded the stock to ‘add’ from ‘buy’ citing its fair valuation. The brokerage, which also raised its target price on the stock from R355 to R375, however, acknowledged that JLR’s operating profit is likely to benefit from a rich product mix and positive operating leverage.