Tata Motors: Unlikely to Evoque interest

After the spectacular success of Evoque in the world markets last year, the performance of Tata Motors has largely been driven by Jaguar Land Rover (JLR). Even though its domestic business is seeing a slowdown in sales, the stock is up 34 per cent year-to-date.

The domestic slowdown did not matter as long as JLR was driving sales and profitability. But with competition heating up in the luxury market across the world, the Street is seemingly less bullish on Tata Motors.

The outlook for Tata Motors has started changing as not only have JLR's margins weakened in Q4FY12, but also because sales of non-Evoque brands have not been encouraging. Earlier this week, CLSA removed the stock from its list of top five buy ideas.

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Over the coming quarters, analysts expect the quality of earnings to deteriorate further as the domestic business continues to face demand pressures and the earnings profile of JLR weakens.

For starters, the market for luxury vehicles is becoming very competitive as competitors offer heavy discounts in key markets like China, which contributes 35 per cent of JLR's Ebitda (earnings before interest, taxes, depreciation and amortisation).

The market is growing at 70 per cent, annually. Morgan Stanley expects JLR to post 17 per cent volume growth in FY13, but margins will remain capped at 15 per cent. The brokerage says that volumes are holding on so far, their AlphaWise survey shows the underlying trend in terms of discounts, inventory and customer traffic is deteriorating.

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Analysts are expecting the stock to remain weak over the near-term, as earnings downgrades are likely after the company's first quarter numbers.

Even though some analysts find the valuation attractive, there are no near-term triggers that will see the stock price move up.

JLR's sales have also started showing weakness after the strong first quarter of 2012.

According to Morgan Stanley, weak trends for June 2012 JLR numbers continued as the company posted a two per cent year-on-year (y-o-y) decline in growth in adjusted sales versus flat y-o-y growth in May 2012, 16 per cent growth in April 2012 and 26 per cent growth in the March quarter.

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The weakness in the domestic business makes matters only worse. Analysts expect the medium and heavy commercial vehicles segment to come under pressure as well in the second quarter on account of monsoon and other macro uncertainties.

All the segments of the company's domestic business, except light commercial vehicles, have seen a sharp volume drop.

Standard Chartered Securities expects the standalone entity to post nine per cent y-o-y decline in revenues on account of two per cent y-o-y decline in volumes and seven per cent decline in average realisation. As a result, operating margin is likely to decline 40 basis points y-o-y to eight per cent.