Buy rating on Tata Motors; JLR: Foot firmly on pedal

With a strong pipeline of launches and a favourable base kicking in from February 2016, China volumes are likely to grow by 26% in FY17

Jaguar Land Rover’s (JLR) retail volumes continued to recover strongly, having grown by 31% y-o-y in February 2016 (up 24% in January 2016). Discovery Sport was the show- stopper, retailing nearly 7.9k units. China sales also continued to increase, with sales up 14% y-o-y (up 5% in January 2016). With a strong pipeline of launches (Jaguar F-Pace, small Range Rover and new XF/XJ) and a favourable base kicking in from February 2016, we expect China volumes to grow by 26% in FY17. Demand in other key geographies (the US, Europe and the UK) should also remain robust, helping JLR clock retail sales growth of 15% in FY16e (22% YTDFY16) and 14% in FY17e–implying a 15% CAGR over FY15e-17e. The stock is currently trading at 12.2x FY18e adj. net earnings.

Event: JLR’s retail sales increased by 31% y-o-y to 37,494 units in February 2016– an improvement over 24% y-o-y registered in January 2016. While sales of the Land Rover models grew by 27% y-o-y, that of the Jaguar models increased by a much higher 50% y-o-y. Land Rover’s sales growth was driven by 7% y-o-y growth in Range Rover Sport and a strong response to the recently launched Discovery Sport. Jaguar’s volume growth of 50% y-o-y was driven by continued strong sales of Jaguar XE. In terms of geography, sales in Europe and the UK were up 52% and 84%, respectively. North America and RoW markets too reported strong sales growth of 27% y-o-y and 13% y-o-y, respectively. China witnessed growth of 14% y-o-y, compared with a 22% y-o-y decline over Apr-Jan’16.

Where do we go from here?

After several months of declining volume growth, JLR posted its first y-o-y gain (up 5% y-o-y) in China in January 2016; sales continued to grow in February 2016, up 14% y-o-y. Overall, we continue to build in a better trend for JLR’s China volumes in Q4FY16 (compared with a 25% y-o-y decline in 9MFY16) on the back of a favourable base kicking in from February 2016. We expect JLR’s volume trends to improve in China on the back of the following factors:
(a) Jaguar XE to significantly increase JLR’s addressable market: The launch of Jaguar XE can help JLR increase its addressable market by a sizeable 20-25% in the luxury car segment. Jaguar XE has been, so far, launched in the UK and Western Europe, where it has received positive reviews and customer response. Jaguar XE was introduced (imported) in China in October 2015. Peers BMW 3-Series and Audi A4 are some of the best-selling models in China.
(b) Discovery Sport launch to fill the void of Freelander: The local production of Discovery Sport started recently through a local JV with Chery (CJLR). The locally produced Discovery Sport has received a positive response in China. We expect the launch of the local Discovery Sport to help achieve volumes enjoyed by the discontinued Freelander.
(c) Other launches: Besides Jaguar XE and Discovery Sport, several new launches have been lined up over FY16 and FY17. Some of the launches, such as new XF and new XJ, can help boost sales of the respective models. Some launches, like Jaguar F-Pace (Jaguar Crossover) and small Range Rover, can help further increase the addressable market share of JLR.
(d) JLR expanding its distribution reach to catch up with peers: JLR currently has ~180 dealer outlets, which is substantially lower than those of peers such as BMW, which has 440 outlets. Management has indicated that it plans to expand the distribution network with 35-40 new outlets annually.

JLR continues to report healthy growth in other key geographies. Sales in Europe, North America and the UK were up 41%, 26% and 26% y-o-y, respectively, over Apr-Feb’16. We expect this momentum to continue as the recent launches continue to do well and new launches  boost volumes.

We expect JLR’s volumes (ex-China) to grow by a strong 15% in FY16 and 14% y-o-y in FY17 (CAGR of 15% in FY15-17e). We expect the company to clock overall volumes of 533k in FY16 and a 13% CAGR over FY16-FY17. The stock is currently trading at 12.2x adjusted FY18e net earnings (adjusted for normalised product development charge of 70% instead of 20% used in reported accounts). Our implied multiple based on the target price is 16.7x FY18e adjusted net earnings.


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First published on: 14-03-2016 at 00:10 IST