Tata Motors Gains Speed Thanks To Jaguar, Land Rover

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Indian automaker Tata Motors knows all about the value of diversification. After all, it's a subsidiary of the Tata Group, a multinational conglomerate with a hand in everything from steel and chemicals to beverages and hotels.

So whenTata Motors ( TTM ) decided to diversify its own business in 2008 with the purchase of the then-struggling Jaguar and Land Rover brands, it figured that a line of luxury vehicles would fit well with its more affordable domestic passenger cars and commercial and construction vehicles.

Six years later, the resurgent Jaguar Land Rover (JLR) business is the primary driver behind Tata Motors' recent growth.

Gaining Speed

Although Tata Motors has seen a slowdown in sales of domestic vehicles, the company has still run off two straight quarters of accelerated sales and profit growth, thanks mainly to its luxury brands.

Meanwhile, its stock price set a record intraday high of 38.92 on Thursday.

"Their growth is really due to the momentum of Jaguar Land Rover," said Richard Hilgert, analyst at Morningstar. "That has really helped Tata's overall business because India is going through anemic economic conditions."

Those conditions have hammered sales at the company's Tata Motors Limited (TML) unit, whose brands include Nano, Indica, Sumo and Indigo.

In March, the TML business saw sales decline 30% from the prior year to 51,184 units. Domestic passenger-vehicle sales slumped 33% to 45,996 units, while exports showed a 46% gain.

The domestic declines follow a general sluggishness in the Indian car industry.

In a recent report, analysts for Trefis cited data from the Society of Indian Automobile Manufacturers showing that year-over-year passenger-car and utility-vehicle volumes in India fell by 4.6% and 5%, respectively, in the 11 months ended in February.

The report also said India's passenger-vehicle market was set to post lower annual sales for the first time in more than a decade.

"Negative consumer sentiment due to high inflation, unstable fuel prices and high interest rates have hurt sales for automakers in India," Trefis noted. "Fitch Ratings expects this trend to continue in fiscal 2015, predicting a 3% to 8% fall in passenger-vehicle sales volume. Unfavorable conditions in the domestic market are also expected to constrict Tata's volumes in the next couple of years."

Despite that gloomy forecast, Tata Motors -- which could not be reached for comment -- has seen its stock price rise more than 40% since Feb. 3. For that, it can thank bullishness over the company's JLR unit.

"Jaguar Land Rover has been extremely profitable, with EBITDA (earnings before interest, taxes, depreciation and amortization) in the high teens," Hilgert said. "Their margins are among the best in the industry."

Brand Tune-Up

Tata Motors bought Jaguar and Land Rover fromFord Motor Co. ( F ) in 2008 for $2.3 billion. The company went to work, cutting costs at the JLR unit, retooling its operations and improving its products. Those efforts continue to pay dividends.

In March, the unit had retail sales of 55,183 units, up 2.7% from the prior year. Sales for the year to date rose 15.9% year over year to 434,311. Jaguar sales, which account for just under one-fifth of JLR business, rose 37.4% in the year to date vs. the same period in 2013, compared with 11.9% growth in Land Rover sales.

Among geographic markets, China had the fastest growth rate for the JLR unit at 33.7% for the year to date.

Other Asia Pacific markets ranked second at 27.7%, followed by North America at 20.2%.

The success of the JLR unit has helped offset a slowdown in other vehicle lines, where competition is on the rise.

Trefis notes that Tata's market share in India's passenger-car segment fell to 9.5% in 2013 from 15.3% as recently as 2010.

"Following the continual poor performance of Tata's car lineup,Honda ( HMC ) overtook the automaker as the third largest passenger-car company in India last year, behind Maruti and Hyundai," Trefis said.

Even so, Tata Motors has delivered two straight quarters of strong growth.

During its fiscal third quarter, which ended in December, the company delivered a 23% year-over-year gain in sales and a triple-digit increase in net income.

"The results were once again driven by an impressive Jaguar and Land Rover performance, which posted record EBITDA margins of 17.9%, higher than our expectations of 15.8%," noted Yaresh Kothari, analyst at Angel Broking.

He expects head winds in the TML business to continue over the near term due to a weak macroeconomic environment.

However, Kothari added, "we expect JLR to sustain its strong performance driven by continued momentum in the global luxury-vehicle market and aided further by the strong product launch pipeline and the success of the newly launched models."

Tata Motors is due to report Q4 and full-year fiscal 2014 earnings in late May, according to the Thomson One website. Analysts polled by Thomson Reuters expect full-year profit of $3.75 per American Depository Receipt, up 24% from the prior year.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: TTM , F , HMC

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