Double-digit growth in JLR volumes likely from October; profitability to improve over next two years.
JLR retail volumes increased by only 4% y-o-y in August 2017, which was weaker than our estimates due to lower-than-expected ramp-up of new Discovery and Velar. JLR China volumes continue to grow at strong pace (30% y-o-y) but volumes in other markets declined on a yoy basis. Range Rover Velar has received strong response from customers and has a three-month waiting period across markets. We expect double-digit growth in JLR volumes from October 2017 onwards. We maintain Buy rating.
JLR retail volumes up only 4% y-o-y in August; China growth strong at 30%: JLR retail volumes rose by 4.3% y-o-y to 38,519 units in August 2017. Jaguar volumes increased by 1% y-o-y while Land Rover volumes improved by 6% y-o-y led by addition of Range Rover Velar. Ramp-up of new Discovery has been slower than expected, while Range Rover Velar is likely to deliver strong numbers from September onwards as it is launched across all markets. China volumes grew by 30% y-o-y to 10,960 units driven by continued ramp-up of local production in Chery JV. North America, UK and rest of the world markets posted decline in volumes on a y-o-y basis. Management stated that Discovery production has been lower than expectations, which has impacted growth. In terms of models, Jaguar XF volumes remained strong in August 2017 (+41% y-o-y). Jaguar F-Pace volumes grew by 9% y-o-y led possibly by ramp-up of China JV production while Jaguar XE volumes declined by 29% y-o-y.
For the Land Rover brand, Range Rover volumes increased by 2% y-o-y while Discovery Sport volumes increased by 11% y-o-y. Range Rover Velar sold 1,601 units in August 2017, which is impressive. Expect volume growth to pick up over next few months: We expect JLR’s volume growth to pick up strongly over the next few months led by (i) ramp-up of retail sales of new Discovery as the model gets launched across markets and (ii) launch of Range Rover Velar in all markets. We note that these two models will drive almost 10% y-o-y volume growth for JLR in FY2018E; we expect JLR’s overall volumes to grow by 13% y-o-y in FY2018e. We expect profitability to improve over the next two years led by lower forex losses and operating leverage benefits. We expect 7-9% Ebit margin in our FY2018-19e estimates as compared to the management guidance of 8-10% Ebit margin over the medium term. We reiterate our positive stance on the stock and maintain Buy rating with unchanged SoTP-based target price of Rs 540.