BackChina worries likely to continue for JLR
Demand in China, JLR's biggest market, is cooling off following a slowdown and slower-than-planned progress in boosting production at new Changshu factory
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Mumbai: China, luxury car maker Jaguar Land Rover Automotive Plc’s biggest market, is likely to be a drag on growth in the near term as demand in the world’s largest luxury car market cools off following an economic slowdown and slower-than-planned progress in boosting production at the company’s new Changshu factory.
A day after Tata Motors Ltd, the parent of the UK luxury car maker, reported earnings that missed consensus estimates by a wide margin, analysts pared their earnings target for India’s largest auto maker.
Although a strong product pipeline of new models will help the firm boost sales in a slow market, a higher contribution of cheaper models such as the Jaguar XE which is expected to be launched in the second half of the current fiscal year, and slower expansion in volumes will hurt JLR earnings at least for the next two quarters, they said.
In a research note on 27 May, analysts Jatin Chawla and Akshay Saxena of Credit Suisse wrote, “We revise down our EPS (earnings per share) estimates for FY16-17 by 6% and TP (target price) to ₹ 610, as we trim our JLR margin estimates to ~17%."
The brokerage firm has cut its sales volume estimates by about 3% to 550,000 as the Land Rover Discovery Sport and Jaguar XF models are now likely to start selling in China only in the second half of the year.
Emkay Global Financial Services Ltd on 26 May also cut Tata Motors’ estimated EPS for the year to 31 March and the following fiscal year by 10% each.
The cut, said the Emkay Global report, was prompted by an anticipation of a lower volumes and inferior mix from a weak Chinese demand, higher than estimated depreciation costs and most importantly, an equity dilution of about 5% from rights issue.
Earlier this month, Tata Motors raised ₹ 9,040.56 crore from its existing shareholders. The proceeds, it said, will be used to retire debt and strengthen the balance sheet.
China accounts for a fourth of JLR’s revenue and a third of its its Ebitda (earnings before interest, taxes, depreciation and amortization). China’s contribution to JLR’s overall sales dropped to 23.5% in the three months to March from 29.6% a year ago as sales fell 20% to 23,526 vehicles, compared with a 36% increase in the year-ago quarter.
Besides a slowing market, the fall in sales volume was also attributed to the shifting of manufacturing lines of a few models, including Range Rover Evoque and Discovery Sport (earlier Freelander), from the UK to its China facility, Tata Motors said on Tuesday. The production of the models was stopped in January to make way for the shift.
JLR recalled 36,500 units of Evoque citing software-related glitches in the gearbox, Reuters reported on 20 March.
In a note on the company’s China sales on 18 May, Credit Suisse’s Chawla and Saxena wrote, “the company faces challenges in scaling up production at its local joint venture with Chery and that it is only producing 1,000 units per month as against 3,000 units per month it was producing before the shift from the UK."
Even as the luxury car market in China is expected to expand at 10% to 2 million units, in 2015 against a 21% growth last year, JLR’s growth will be slightly higher at 140,000 units in 2015 compared with 126,000 units in the previous year, said Huaibin Lin, manager, China light vehicles sales forecast at I.H.S Automotive in Shanghai.
The growth, he said, will be led by local production of newer models and presence of sports utility vehicles, which have a relatively stronger traction even in a slow market, in the company’s portfolio. He, however, added discounts on Jaguar cars at 30% of the retail price are higher than the 25% discount offered by German rivals Audi AG, Mercedes-Benz and BMW AG.
On Wednesday, Tata Motors shares fell 5.12% to ₹ 471.65 on BSE, while the benchmark Sensex rose 0.12% to 27,564.66 points.
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