Tata Motors: Why Analysts Are Optimistic Despite 49% Fall in Q1 Profit

Tata Motors shares traded off the day's low after earlier dropping as much as 2.5 per cent on weak Q1 results. The owners of the luxury Jaguar Land Rover brands had on Friday reported a 49 per cent slump in net profit and 6 per cent fall in net sales during the June quarter.

Reasons for the sharp fall in net profit

1) Tata Motors' Jaguar Land Rover unit is facing challenges in its biggest market - China. Jaguar Land Rover sales in China fell by a third during the June quarter, pulling down total sales at the luxury carmaker by 1 per cent.

2) According to Kotak Institutional Equities, China sales declined to 14 per cent of total volumes in the June quarter versus 30 per cent of volumes in the corresponding quarter last year and 18 per cent of volumes in the March quarter.

3) Tata Motors has been criticised for pricing its locally-made Range Rover Evoque SUV too high in China. The company was also forced to recall some vehicles over quality issues, which didn't help matters, analysts say.

4) The weakness in China is a big concern for Tata Motors because strong sales of Jaguar Land Rover cars in China have long propped up profits at the company.

5) Jaguar Land Rover is not the only company facing problems in China, where economic growth has slowed to a 25 year low; automakers such as BMW and General Motors have also been facing headwinds in China, which is the world's biggest car market.

Tata Motors did not witness a huge cut post Q1 earnings because a majority of analysts retained their "buy" call on the stock saying China-related weakness looks largely discounted and valuations remain supportive. Tata Motors shares have fallen over 25 per cent over the last three months.

"Given the sharp fall in the stock in the past few months, it is factoring in China negatives but ignoring positive response to recent launches and strong product cycle," Credit Suisse said.

Tata Motors on Friday said it has cut prices, sales and production targets at its Jaguar Land Rover arm in China. The company also cut the price of JLR's locally-made Range Rover Evoque sport-utility vehicle (SUV) by up to 6 per cent, and lowered the launch price of its Jaguar XE compact sedan.

According to Nitesh Sharma of Phillip Capital, Jaguar Land Rover should see a return to sales growth from the December quarter driven by new launches and as management improves brand awareness for the China-made Evoque.

Analysts also took heart from the domestic performance of Tata Motors; car sales in India have picked up and commercial vehicles cycle has bottomed out helping Tata Motors beat domestic sales estimates, analysts said.  

"Medium and heavy commercial volumes increased by 21 per cent year-on-year and passenger car volumes rose by 41 per cent year-on-year in the June quarter offset by weak light commercial vehicles volumes," said Hitesh Goel of Kotak.

The brokerage has a "buy" rating on Tata Motors with a target price of Rs 525.

Tata Motors shares ended 1.71 per cent lower at Rs 385.85 apiece compared to 0.46 per cent fall in the broader Nifty.

(With inputs from Reuters)