Tata Motors Ltd’s shares fell 7.6% on Wednesday, after the company reported weaker-than-expected sales volume in its luxury car division, Jaguar Land Rover (JLR), for April. But investors have themselves to blame for building up high expectations for a typically soft period for luxury car sales.
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Karne adds that using the above-mentioned seasonal trend, JLR needs to report average monthly sales of 24,000 vehicles in the June quarter. The reported volume of 25,143 vehicles in April is slightly ahead of his estimates.
Unless sales fall considerably in the second half of the year, JLR seems set for another year of steady growth, aided by continued strong growth for Evoque. Recent commentary from other luxury car makers such as Daimler AG and BMW AG suggests that the luxury car segment is doing relatively well, despite the macroeconomic uncertainty. With fears of a double-dip recession fading, sales in the segment have picked up. The Tata Motors management, too, has indicated that JLR sales will grow 20-27% in this fiscal year.
The healthy demand for its products means that the company doesn’t need to resort to high discounts to generate sales. What’s more, because of JLR’s high operating and financial leverage, the firm’s earnings grow at a disproportionately higher rate when its volume rises. And recent forex movements have aided the luxury car maker further.
Sure, much of this seems to be priced into Tata Motors’s shares, which have risen by more than 47% this year, despite the recent correction. Perhaps, it made sense for the stock to take a breather after its sharp rally. But as long as JLR volumes keep rising, there will be takers for the stock, given the leverage play.
Graphic by Yogesh Kumar/Mint
