Tata: New Model Launches And Production Expansion Could Drive Volume Growth For Jaguar Land Rover

Tata Motors‘ (NYSE:TTM) luxury automotive division Jaguar Land Rover (JLR) forms more than 95% of the company’s valuation, according to our estimates. The British marquee brand saw volume sales rise 9% year-over-year to 462,678 units last year, nearly double the sales figure in 2010. Despite continual increases in volume sales at JLR, investor reaction to the Q2 (ended September) results reflected slight disappointment, mainly as the growth fell short of expectations and previously reported strong growth figures. Weak economic conditions in Brazil and Russia have somewhat dragged down the company’s volumes, and depreciation of certain foreign currencies have hurt revenue growth. But the key for Tata is that sales in its biggest markets — China and Europe — continue to remain strong. While the overall results might be construed as the start of slowing growth for Tata and its robust luxury vehicle division by some, we believe that the company is geared for strong growth, beginning next fiscal year, on the back of new launches and local production in China, and in Brazil later on.

Trefis’ price estimate for Tata Motors is $44, which is roughly 2% above the current market price.

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Make Way For Jaguar’s New SUV and Compact Sedan In 2015

Two Jaguar models to look out for in 2015 will be the compact sedan XE and the SUV F-Pace. Both the models will be built on the same lightweight aluminum monocoque at JLR’s Solihull factory, where for the first time Jaguar models will be manufactured (only Land Rover models were built before this). The company has already invested £1.5 billion (around $2.3 billion) to support the introduction of its new aluminum and lightweight technologies, and plans to create 1,300 new jobs. SUVs and compact sedans are two of the fastest growing segments in the premium vehicle market, and JLR will hope to gain from this high demand in the coming years. The market for luxury SUVs in China, which formed 26% of JLR’s net volume sales last year, is expected to double to 1.2 million units by 2020. Just for reference, less than 200,000 units of luxury SUVs were sold in China in 2010. On the other hand, premium SUVs/crossovers was the highest growth segment in 2014 in the U.S., the world’s largest luxury vehicle market.

Jaguar presently competes only in the mid to high-end of the premium auto market, and with the introduction of the XE, the British automaker will enter the fast growing compact saloon segment. The XE is set to be a volume model for Jaguar, which will compete with bestsellers such as BMW 3-series, Audi A3 and A4, and Mercedes-Benz C-Class in the lower-end of the premium vehicle market. Following the launch of the XE, we expect volumes for the British manufacturer to increase significantly, but the average revenues per vehicle to fall on account of the lower prices for the XE. On the back of high anticipated sales for the XE and F-Pace, and factoring in Jaguar Land Rover’s expanding production footprint, we expect unit sales for Jaguar to rise approximately 80% between fiscal 2015 and 2018 ended March.

Higher Production To Meet Growing Demand

Demand for luxury vehicles remains high around the world, even in countries where the overall automotive industry is down, for example in Brazil and India. JLR plans to extend its production footprint, especially in low-cost countries and places where premium demand remains high, in order to produce vehicles near the end customer. The company will begin local production in its single largest market, China, by Q4 of this fiscal year, and has started building its first fully-owned manufacturing facility outside the U.K., in Brazil. Local production will help the automaker feed local demand at competitive prices and also help evade supply constraints that limit the sale of JLR vehicles. The company aims to build three models in the China plant, in partnership with the Chery Automobile Company, with an initial annual production capacity of around 130,000 vehicles, by 2016. On the other hand, the $290 million (750 million Reals) Brazil plant in Itatiaia, near Rio de Janeiro, will employ 400 employees, include an education and business center, and have an annual production capacity of 24,000 vehicles.

Luxury vehicle demand is expected to remain strong in China and Brazil, where the premium segment constitutes only 7% and less than 1.5% respectively of the overall automotive volumes. In contrast, luxury volumes form 10-11% of the net auto sales in the U.S.  Local production will allow JLR to evade hefty import tariffs, thereby lowering the model prices. JLR’s vehicle prices are expected to fall by 15% on account of local production in China, which is one of the reasons why we expect the average revenue per model to fall for the British brand in the near term. Improved competitiveness on the pricing front should help drive volume growth for Jaguar Land Rover going forward.

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