Demand for Tata Motors’ luxury cars falls in China

The demand for Tata Motors’ luxury cars in China has declined in March quarters to its lowest level in the last four quarters. The India’s biggest automaker is feeling the heat as a result of the weak growth in the country’s luxury car market. The automaker earns one-third of its revenues from China.

The key parameters such as margins, realization, and product mix or volume growth have been affected as they all have been diluted in the March quarter.
The auto manufacturer, maker of world's fourth largest luxury car--Jaguar Land Rover's operating margins has declined sharply; the realizations dropped 3.3% on a sequential basis, while the China volume growth slipped by 21% on a year-on-year basis in March quarter. The Chinese market is very important for the JLR as the company derives about a quarter of its total sales, one-third of the revenues and 40% of the total operating profits from the world's largest populated nation.
Earlier, JLR’s profits were good mainly on account of a higher growth recorded in the Chinese market.
Moreover, investors are now keenly watching out for how the company is going to address two key factors of volume ramp-up and margins trajectory of JLR in China in its upcoming earnings result.
The company has been witnessing declining volumes of JLR in China as it has been in the transitory phase. It has recently commissioned its new facility in the country which has an installed capacity to manufacture 130,000 units of cars a year. So, in order to maintain the quality from its new plant, the initial pace of ramp-up has been slow.
The auto-maker manufactured 4,000 units in March quarter from its China plant. Though there are few naysayers about the probable ramp-up of volumes in China, the company has enough buffers to push its volumes, hence it is now just a matter of time for it to post northward volume growth. Analysts are factoring-in sales of 1.27 lakh units and 1.80 lakh units from China in FY16 and FY17 respectively, as against 1.19 lakh units it sold in FY15.
JLR's average discount per vehicle in China market is 5-10% lower than the peers (BMW, Audi, Daimler), so vehicles sold in China fetches premium margins as compared with the margins realized by the company in other geographies.
If the volume growth in China comes at a lower margin (can happen by bringing down either its average discount or higher dealer incentives, or also by reducing the poor product mix), street may reset their margin estimates for the company. Street is factoring-in JLR's margin to be between 18-19% in the current and over the next fiscal year, compared with 18.9% seen in FY15.

(Image: Reuters)