Mumbai: Tata Motors shares fell 11.9% on Wednesday, wiping more than $1.5 billion off the value o f the Indian car maker, as a fall in operating margins at its Jaguar Land Rover unit gave investors a sobering reality check.
The auto maker said on Tuesday profitability at the luxury unit had fallen from the previous quarter, raising concerns that the company’s key earnings driver was losing speed during a worrisome period for the global economy.
China, a crucial market for JLR, is expected to see growth ease this year to its weakest pace in 13 years, while economies throughout Europe are still struggling, with some such as Britain mired in recession.
Even India’s economy is struggling, with growth expected to slow to around three-year lows, dampening car sales and further clouding the outlook for Tata models at home.
These concerns dented some of the optimism about JLR that had helped make Tata one of the best performing Indian stocks so far this year, with a 54% surge as of Tuesday’s close.
“In the last quarter, margins went through the roof,” said Joseph George, industry analyst at India Infoline in Mumbai.
“Expectations had gone up, people were factoring in 17, 18% long-term, and today they came crashing down,” he said, adding that he did not expect the stock to fall much further.
Analysts including Morgan Stanley and UBS downgraded their estimates for Tata Motors on Wednesday, expressing concerns about the sales outlook for JLR, which accounted for more than 95% of its net profit in the latest quarter.
Much will depend on JLR’s future sales growth in China, which accounted for 17.3% of JLR’s wholesale volumes in the year to March, up from 11.3% in the previous year.
JLR chief executive officer Ralf Speth said at the results briefing on Tuesday he expected Chinese demand to increase further this year, but analysts are expressing some doubt.
“Macro headwinds in Europe and the slower-than-expected ramp-up at China are likely to impact JLR’s volumes in FY13,” Standard Chartered said in a note.
Shares in the car maker fell as much as 12.4% on Wednesday before closing down 11.9% at Rs243.05, in its biggest daily percentage decline since April 2009.
Tata Motors shares had been on a roll this year as investors had banked on Jaguar Land Rover, which the carmaker bought for $2.8 billion in 2008, to drive profit growth.
Boosted mainly by strong demand in China and other emerging markets, JLR’s sales volumes have soared 29% over the past 12 months, but doubts started to emerge two weeks ago when Tata Motors posted flat global sales in April.
They were reinforced on Wednesday when Tata said JLR’s operating margins fell to 14.6% in the last quarter from 20.1% in the previous quarter.
Morgan Stanley cut its price target for Tata on Wednesday to Rs291 from Rs313. UBS cut its 12-month price target to Rs270 from Rs320 and maintained its “sell” rating on the stock.
Tata is also facing a challenging domestic sale environment, especially as some consumers are believed to have frontloaded their purchases ahead of the unveiling of the Union Budget for the 2012-13 in mid-March, which, as widely expected, raised excise duties for vehicles.
Still, some analysts say Wednesday’s sell-off may have been overdone.
“The stock had topped out before this, and that has exacerbated the negative reaction today,” said Nikhil Deshpande, auto analyst at PINC Research in Mumbai.
“We should see the stock stabilize going forward.”