With domestic commercial vehicle sales on a roll for several months, shares of Tata Motors Ltd, which has the largest share in domestic markets, should be surging. But the reverse is happening. The shares have fallen by 20% since January, twice as hard as the BSE Auto index and much more than most of its automobile peers. Brokerage firms and research houses, too, have cut the company’s consolidated earnings estimate by about 20-25% for the next two years.

The problem lies with its British subsidiary and cash cow Jaguar Land Rover Ltd (JLR), which accounts for 70-75% of sales and 100% of the profits of Tata Motors. Concerns over this luxury car maker’s performance are growing on the Street, what with dimming sales growth and faltering profit margins since the last three-four quarters.

Just the monthly sales numbers of JLR speak volumes. From double-digit growth until FY16, year-on-year sales growth has been steadily slipping with every passing month (see chart). Initially, the company said the sharp drop in sales was due to phasing out of one of its key luxury models and replacing it with another. However, growth remains in low single-digits for most months since September 2016.

Analysts concede that the impact of new launches and refreshes that swept the competition off its feet when Tata Motors restructured the ailing JLR is fading away. The latest December quarter results showed a year-on-year drop in sales volumes in the three large markets—the UK, Europe and North America—that account for a little over half of JLR’s total sales. China, which accounts for a fourth of total sales, is the only region posting sales growth, although it is tapering off on a higher base.

Auto analysts are convinced that developed markets are battling macroeconomic challenges too. The North American growth rate for luxury and diesel vehicles is slowing down. The UK is reeling under Brexit-led issues such as higher tax rates that have slowed consumption. Perhaps JLR may circumvent Brexit issues of higher tax on imported vehicles in Europe once its Czechoslovakian plant gains traction.

Then there are reasons specific to JLR’s product expansion strategy that has led to margin dilution.

According to Bharat Gianani, analyst at Sharekhan Ltd, “Jaguar’s contribution to JLR’s total sales rose from 19% in FY2016 to 27% at the end of nine months in FY2018. As a brand, Jaguar’s vehicles enjoy a lower margin compared to Land Rover, since they directly compete with the Big 3 global luxury players— BMW, Audi and Mercedes Benz. So far, JLR has been acclaimed for its rugged SUVs and less known for its sedans, crossovers and hatchbacks, where the Big 3 have expertise already."

Meanwhile, analysts are also not convinced about JLR’s strategy to tackle the era of electric vehicles. The management has stated that this would hit profitability at least in the initial years.

Adding to the woes are losses incurred on forex hedges during the Brexit announcement that continues to weigh on margins, although to a lesser extent now. Weak cash flows may put further innovation and marketing at stake.

The only silver lining is the improving state of the domestic business. Commercial vehicle sales are doing very well, and margins are improving steadily and supporting consolidated margins a bit. However, JLR’s steep slide in operating margin from 14.4% in Q3FY16 to 10.9% in Q3FY18 has raised red flags for investors. Given that JLR still comprises almost all the consolidated net profit of Tata Motors, troubles in the main cash spinner will shake investor confidence.

So, a cutback in earnings estimates for the next two years is justifiable. Without doubt, unless JLR’s sales make a magical U-turn to support overall profit expansion, the Tata Motors’ stock is unlikely to bounce back, even as its peers make hay on rising sales.

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