Tata Motors Ltd’s depository receipts fell by as much as 9.2% on the New York Stock Exchange on Friday. While share prices of other Indian companies also fell in the weak US market, the drop in Tata Motors’ share price was the steepest.

The sharp fall seems to have been prompted by news that the company’s managing director and group chief executive officer Carl-Peter Forster has resigned.

The concerns aren’t misplaced. JLR has been driving overall growth for the company for the past many quarters, and the unit’s results have been good since Forster took charge in February 2010. The luxury car unit generated cash for the first time in the quarter ended March 2010, and has done well in both growing profits and generating cash in subsequent quarters.

Of course, much of this was because of the recovery in the global economy during the period and the surge in sales in emerging markets such as China. At the same time, due credit must be given to the management for reviving JLR and reducing the overall debt at Tata Motors.

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It goes without saying that leadership transitions are rarely smooth, and in the backdrop of a challenging business environment in JLR’s main markets, sales could be impacted.

All this has yet to be factored into the valuations of the company’s shares listed in the home market, since the news broke after the markets closed in India on Friday. The depository receipts are now at an 18-month low and have declined by as much as 57% from its highs in November last year. If the company’s shares fall in the domestic market at the same rate as the depository receipts fell last Friday, they would trade below 700 per share, or almost 50% lower than last year’s highs. The Nifty has corrected by 20% from its highs late last year.

Apart from concerns about the slowdown in developed markets impacting volumes, investors are also worried about the possibility of a decline in margins. The company management told analysts last month that JLR margins are likely to decline owing to a weak dollar.

But has the outlook for the company changed so dramatically that its shares should halve in value? It should be noted here that Tata Motors has a high operating and financial leverage, and both the upside and downside tend to be very high depending on the business environment. This is the reason the company’s shares had risen disproportionately in 2009 and 2010.

Now that the tide has turned, the shares are retreating double quick.

Graphic by Yogesh Kumar/Mint

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