Better-than-expected volumes in the September quarter at its British subsidiary Jaguar Land Rover (JLR) led to an 8 per cent surge in the stock price of Tata Motors. JLR reported volume growth of 50 per cent on a sequential basis, led by higher sales in China and the UK. This growth was led by improving demand and new launches, such as the Land Rover Defender. A large part of growth in Q2 came in September.
Though volumes as compared to the year-ago levels were down 12 per cent, those were an improvement over the 42 per cent year-on-year decline in the June quarter. With a quarter of sales each from the UK and the European Union (EU) markets, any uptick would have a significant impact on JLR’s global volumes.
Analysts at JM Financial indicate EU's auto demand has started to recover and global automakers are turning optimistic about growth in the second half of the calendar year. Increased production at JLR’s plants in the UK and Slovakia amid rising demand also reflects the pace of recovery. While the brokerage believes the commentary may lead to sales surprises from JLR, they caution upsides may be capped because of the EU's emissions penalty in 2021.
Rising volumes and cost-cutting efforts are expected to rub off positively on cash flows. The firm has highlighted a slight increase in cash flows in the quarter and volume uptick are the single-biggest factor for ensuring higher free cash flows.
Though most brokerages are positive on the company's outlook, analysts at JP Morgan maintain an underweight stance given that JLR, despite increasing volumes, is lagging bigger peers on the sales front.
The other positive is growth in passenger vehicle volumes in India. This was up 163 per cent over the year-ago quarter on a favourable base, higher retail sales, need to boost channel inventory, and the favourable response to newly launched Altroz. Year-to-date commercial vehicle sales, which are down 62 per cent, reported a fall of about 4 per cent in the September quarter, highlighting a recovery. Festival demand and pick-up in economic activity would be critical for the progress on passenger and commercial vehicle sales, respectively.
While the trends for JLR and the domestic market are positive, investors should await a sustained volume performance before considering the stock.