Maintaining Buy with a target price of R540/share (24% upside): Our thesis on Tata Motors is premised on Jaguar Land Rover’s (JLR) new model cycle, which is expanding its addressable market. The launch of the XE (3-series/C-class segment) will enable JLR to address 70% of the global luxury market compared with 48% earlier. The slower-than-expected production ramp-up in China has impacted stock performance (-14% vs. Sensex) YTD—year-to-date—and we cut our FY16e EPS (earnings per share) forecast by 10% to factor in the delay.

While the implied valuation for JLR (3.2xFY17e EV/Ebitda—enterprise value/earnings before interest, taxes, depreciation and amortisation—at 20% discount to peers) prices in the near-term concerns, the strong order book for new models is being ignored. Monthly volumes from July/Aug 2015 could be a key catalyst.

JLR–expanding its addressable market: We expect JLR’s volume CAGR (FY15-18e) at 15%. We forecast JLR’s volume growth to recover sharply in H2FY16, driven by the launch of Discovery Sport, Jaguar XE and the F-Pace (early 2016). Volumes for JLR have been impacted over the past five months (+2% year-on-year) due to the slower-than-expected ramp-up in local production of Evoque in China. However, we expect the issue to normalise in the coming months, and the momentum from new products should result in strong volume growth.

Nevertheless, we are cutting our China volume growth forecasts for FY16e from +3% to –10% to factor in lost volumes. However, we expect the rebound to be equally strong in FY17e/18e, and forecast growth rates of 42%/30%. For JLR’s global sales, we cut our FY16e forecasts by 5% but increase our FY17e forecast by 3%.

JLR

Jaguar XE represents 22% of luxury car market: The global luxury car segment has an annual market size of about 8 million units. The entry-level luxury sedan is represented by models such as the BMW 3-series, Mercedes C-Class and Audi A3/A4. This segment has a market size of under 1.7 million annually and constitutes 22% of the global luxury car market .

JLR has just entered the entry-level sedan segment with the launch of the Jaguar XE. We estimate that the XE will expand JLR’s addressable market by 45% from 3.8m to 5.5m.

XE could do an Evoque: Prior to the launch of the Evoque in FY12, JLR’s product portfolio was limited to large SUVs and mid- to high-end luxury sedans, which cumulatively represented only 33% of the market. The success of the Evoque expanded. JLR’s addressable market to 48% of the global luxury segment and was largely responsible for the 18% volume CAGR (compound annual growth rate) during FY11-15.

A stronger brand would correct market share skew: The global luxury car segment is dominated by sedans, which constitute 70% of volumes, while SUVs comprise 30% of overall volumes. In the case of JLR, the composition of its volumes is reversed. The Land Rover brand of SUVs comprises 86% of JLR’s volumes, while Jaguar cars form only 14%.

Despite having a healthy market share within the SUV segment (17%), JLR’s overall share within luxury is only at 6% as it lags significantly in the sedan segment (1.4% share). While the absence of a high-volume product (XE) has been a handicap, even the existing sedans (XF and XJ) have a 4-6% share in their respective segments (5-series/7-series). We note that the next refreshes of the XF and the XJ would be based on the same platform as the XE. A successful XE launch could have a positive rub-off effect on JLR’s competitive position in the higher-end sedan segments.

Focus on lower priced models to drive down margins: We are forecasting JLR’s margins to decline by 200 basis points in three years We expect JLR’s Ebitda (earnings before interest, taxes, depreciation and amortisation) margin to decline from 18.9% in FY15 to 16.9% by FY18e due to the launch of new models which are in a lower price segment. The sedan segment is more competitive than the SUV segment globally. In addition, the profitability in China is likely to compress for most luxury car players due to pricing pressures.

XE to help Jaguar brand revival: We expect the XE to be the driver of volumes at Jaguar and constitute 80% of the incremental volumes in FY15-18e. Our forecast of 85.5k units in FY18e implies a segment market share of 5% based on the current market size.

Evoque will decline in FY16e but recover in FY17e/18e: We expect Evoque volumes to decline 5% in FY16e due to the volume loss in China. However, we expect a 10% CAGR during FY16-18e, driven by better volumes in China and launch of new variants and refreshes of the Evoque during 2016/2017.

Order book for new models is robust: JLR has indicated that the order book for the new Discovery Sport is at 50k units. The Discovery Sport is the replacement for the Freelander, which had volumes of 38.7k units in FY15. The Jaguar XE already has an order book of 25k units, which is commendable considering that it is yet to be launched in the US and China.

Can XE repeat Evoque success? The launch of the Evoque in FY12 resulted in a doubling of company volumes in four years. The XE segment is 22% of global luxury demand, where JLR has been absent. We forecast that new model launches would drive a volume CAGR (FY15-18e) of 15%. While profitability will trend down as model mix weakens, the impact would be partially offset by lower incentives and gains from platform rationalisation. We factor in a 200 basis point fall in JLR’s Ebitda margins to 16.9% by FY18e but still forecast Ebitda CAGR (FY15-18e) of 9%

Do not extrapolate from demand slowdown in China: JLR’s China volumes were down 23% y-o-y during Jan-May 2015, as the transition of Evoque from imports to local production has not progressed as per expectations. We forecast JLR’s China volumes to fall 10% in FY16e but improve to +36% per annum in FY17/18e due to stabilisation of local Evoque and new models. Investors are concerned on China, but our Autos team expects a pick-up in H2CY15 driven by upgrade demand and higher auto financing penetration. Companies with strong product pipelines will likely outperform, as is evident in Mercedes’ YTD volume growth at 16% – due to a younger model line-up – while BMW (3% YTD) and Audi (4% YTD) have lagged.

We value Tata Motors at R540: We value JLR at R482/share, India business at R49/share, and financing business at R9/share . Risks: failure of new models and China slowdown.

—Deutsche Bank