Jaguar Land Rover Lifts Tata Motors’ Q1 Results As China Fuels Growth

Indian automaker, Tata Motors (NYSE:TTM), reported strong Q1 results on August 11, on the back of continual growth in the Jaguar Land Rover (JLR) business, which forms more than 95% of the company’s valuation by our estimates. ^[1] Net revenues grew by over 38% year-over-year to 646.83 billion rupees (around $10.57 billion) in the first quarter of fiscal 2015 ended March, with around $9 billion contributed by the luxury vehicle division Jaguar Land Rover. With growing premium vehicle demand in emerging economies, rebounding European markets and strengthening North American markets, JLR’s retail volumes rose 22% to 115,596 units in Q1. ^[2] While JLR drove growth for Tata Motors in the quarter, the standalone business of Tata and other branded vehicles continued to witness declining demand in a weak Indian automotive market. Lower infrastructural investments, high fuel prices and freight rates, dragged down volumes for medium and heavy trucks in India, in which Tata boasts a massive market share of 54%. Tata now plans to launch a host of new products in both the passenger and commercial vehicle segments, including a new hatchback, the Bolt, and a new sub 4-meter compact sedan, the Zest, in a bid to reverse the trend of free-falling sales in the domestic market. Despite declining sales in Tata’s standalone division, high demand for luxury vehicles is expected to fuel growth for Jaguar Land Rover and consequently Tata Motors, going forward. Volumes for JLR are expected to rise as Tata increases investments aimed at capacity expansions and deeper penetration into newer markets.

Trefis price estimate for Tata Motors is $38.95, which is roughly 6% below the current market price. However, we are currently in the process of incorporating the latest quarterly results into our forecasts.

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China Drives Volume Growth For Jaguar Land Rover

China has been a strong sales market for luxury vehicles due to low current luxury ownership rates, a rising proportion of affluent individuals, and their strong affinity for premium brands. The country is expected to become the largest premium automotive market in the next couple of years, and sell over 3 million luxury vehicles annually by 2020, almost double the volumes presently. Jaguar Land Rover’s volumes in China, which presently constitutes 24% of the net volumes, rose by a massive 61% year-over-year in Q1 to 32,912 units, and could continue to grow as the British luxury brand eyes further expansion in the country in the form of local manufacturing and new model launches. Jaguar Land Rover presently holds around 6.5% share in China’s luxury vehicle industry. If JLR improves its share to only 10-11% by the end of the decade, China volumes could form around one-third of the expected net volumes for the automaker by then, given the estimate of 3 million premium vehicles sold in the country by then.

• JLR Will Begin Local Production In The Latter Half Of This Year

Tata Motors was previously present in China as a wholly foreign-owned enterprise, but entered into a joint venture with the Chery Automobile Company in October 2012, as part of a 10.9 billion RMB investment, to assemble units as well as manufacture China-specific models. Production of the first Land Rover sports utility vehicle (SUV) built under this partnership is set to begin by the end of this year, and the plant will have an initial annual production capacity of around 130,000 vehicles by next year. Seeing how JLR has sold 115,562 units in China in the twelve months ended June, this manufacturing facility should be able to feed a large portion of the local demand going forward. Jaguar Land Rover’s vehicle prices are expected to fall by 15% on account of local production, which will reduce import tariffs and transportation costs. ^[3] Relatively lower vehicle prices should boost demand for JLR in China.

• New Model Launches And Increased Availability To Boost Volumes

Apart from expanding local production in the China plant, which in the first phase would produce the Range Rover Evoque, The Freelander and the Jaguar XF, JLR is also queuing-up new model launches in the country. ^[4] Jaguar is set to introduce its compact sedan XE, based on the new lightweight aluminium monocoque, in early 2015. The model could also make its way into the compact luxury vehicle market in China soon after launching. In addition to the XE, Jaguar also plans to launch its crossover codenamed C-X17, also built on the same aluminum architecture.

Demand for luxury vehicles in the world’s most populous nation might be driven by compacts, fueled by growth in the number of mainstream households. Mainstream households consist of potential luxury item buyers, who are most likely to purchase lower-ranged premium vehicles. Over 50% of additional growth in the number of mainstream households in China will be contributed by lower-tier cities, according to McKinsey. ((“Upward mobility: the future of China’s premium car market“, mckinsey.com)) Both the XE and C-X17 will compete in the rapidly-growing compact luxury segment in China’s auto market, which is expected to form 20% of all luxury vehicle sales in 2015, up from around 11% in 2012. ^[5]

Going Forward, Average Revenue Per Vehicle For JLR Could Fall

While combined annual volumes for the Jaguar and Land Rover divisions might reach close to 1 million by 2020, up from 435,632 units sold in the twelve months ended June, the average revenue per vehicle is expected to decline. This is because most of the growth is expected to come from China and compact models, going forward. With Jaguar Land Rover starting local production in China this year, the plant is estimated to reach production capacity of 130,000 units in the next couple of years. If we estimate JLR’s China volumes to grow by 30% annually through fiscal 2017, locally produced vehicles might be able to supply over two-thirds of the anticipated demand. This will lower the average revenue per unit as imported vehicles in China are roughly 2.5-3 times more expensive than their counterparts sold in the U.S., owing to the import tariffs, other taxes and transportation costs.

In addition, according to a recent probe conducted by China’s antitrust regulator, the National Development and Reform Commission (NDRC), foreign companies such as Audi and Chrysler have been found guilty of monopolistic practices pertaining to highly inflated vehicle and spare part prices. In view of this investigation, Jaguar Land Rover has also reduced prices for two Range Rover models and the sports car Jaguar F-Type Cabriolet by up to 19% in the country. ^[6] This is also expected to impact the average revenue per vehicle for the British automaker. According to our estimates, Jaguar Land Rover’s revenue per vehicle in China was 45% higher than the overall average revenue per unit for the automaker in fiscal 2014. If vehicle prices of half the fleet fall by around 20% by fiscal 2016, JLR’s China revenues could lower by roughly $1.9 billion in that year. However, the automaker plans to make up for this deficit by increasing operational efficiencies and leveraging economies of scale, once local production is underway, in order to protect profitability.

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1. Tata Motors Q1 results [↩]
2. Jaguar Land Rover monthly volumes [↩]
3. “Jaguar Land Rover China production to start end of this year“, April 2014, bloomberg.com [↩]
4. Tata Motors earnings transcript [↩]
5. “Germans think small in China“, September 2013, wsj.com [↩]
6. China pressure brings Jaguar Land Rover price cuts, wsj.com [↩]