Volume growth for JLR should remain robust in FY14F led by strong growth in China, says Nomura Equity Research in its report on Tata Motors

Volume outlook in the domestic MHCV (medium and heavy commercial vehicle) industry remains weak at least in the near term. The recent decline in market share in MHCVs partly reflects lower dispatches due to inventory adjustments. Further, as per Tata Motors (TML), competitors have added inventory which has impacted TML’s market share; retail market share is much higher for TML than the share based on wholesale volumes.

The company has reduced inventory in the passenger car segment over the last few months. Thus, retail volume run-rates in this segment are higher than wholesales seen over the last few months, according to the company.  In terms of new launches, the company will launch more trucks under its Prima range in the MHCVs and ACE family in the LCV segment over the next one year. Further, there will be entire new range of vehicles which will be launched in FY14F in the LCVs segment called ‘Ultra’ range, according to the management.  In the car segment, there will be new variants and refreshments launched for different models over the next one year. The company maintained its capex target of Rs30 billion annually.  This is Tata Motors’ domestic scenario in a nutshell, according to Nomura Equity Research analysts in its report on the company.

Volume growth for JLR should remain robust in FY14F led by strong growth in China. Nomura expects margins to remain in the 15%-15.5% range over the next two years. Global slowdown remains a key risk, while stronger-than-expected success of new models could present upside to medium-term volume growth. 

According to Nomura, JLR will look to expand its dealer network to 150 dealers over the next one year (120-130 dealers currently). 4QFY13F should see the full benefit of the launch of the new Range Rover and start of All Wheel Drive (AWD) and smaller engine models in Jag XF, XK models. This should particularly help improve demand growth in the US market, according to the company.  The new XF Sportsbrake will be launched in this quarter, while F-TYPE model will be launched in 1QFY14. 

Adverse currency movements (quarter-on-quarter) impacted margins by around 50 basis points in 3QFY13. Further, margins were also impacted by an inferior product mix, higher variable marketing expenses and launch expenses of the new Range Rover.  The Castle Bromwich plant (manufactures Jag models) is now working on a two-shift basis (compared to one-shift earlier) due to the new model launches. The other two plants at Solihull and Halewood continue production on a three-shift basis.

JLR’s margins should improve driven by product and geographic mix, while the domestic business will likely continue to face headwinds. Given the bullish stance of its China Autos team on the luxury segment, Nomura has revised up its volume estimates for JLR, but reduced its estimates for the India business. Overall, its consolidated EPS estimates are down by 5% for FY14F and up by 2% in FY15F.

Nomura analysts note that Bloomberg consensus FY15F EV/EBITDA multiples of other luxury car companies average around 2.5x, compared to 3x for JLR; thus already factoring in a stronger performance.

TML’s 3QFY13 adjusted net profit of Rs18.1 billion was below Nomura’s estimate of Rs25.3 billion. JLR’s net profit at GBP296 million was in line, but a domestic net loss at Rs4.5 billion was significantly below Nomura’s estimate (loss of Rs1.4 billion). Margins for JLR at 14% were in line, while those for the stand-alone business at 1.4% were a negative surprise, according to Nomura analysts.

Nomura remains ‘Neutral’ on whether to buy or sell the Tata Motors share in the stock exchange.