The shares of Tata Motors fell 11.9% on Wednesday, wiping more than $1.5 billion off the value of the Indian car maker, as a fall in operating margins at its Jaguar Land Rover unit gave investors a sobering reality check.
The auto maker had said on Tuesday that profitability at the luxury unit had fallen from the previous quarter, raising concerns that the company’s key earnings driver was losing speed during a worrisome period for the global economy.
Analysts including Morgan Stanley and UBS downgraded their estimates for Tata Motors on Wednesday, expressing concerns about the sales outlook for JLR, which accounted for more than 95% of its net profit in the latest quarter.
Much will depend on JLR's future sales growth in China, which accounted for 17.3% of JLR’s wholesale volumes in 2011-12, up from 11.3% a year ago.China is expected to see growth ease this year to its weakest pace in 13 years, while economies throughout Europe are still struggling, with some such as Britain mired in recession.
Slowdown shadows on India are also a dampening car salesfurther clouding the outlook for Tata models at home.
These concerns dented some of the optimism about JLR that had helped make Tata one of the best-performing Indian stocks so far this fiscal, with a 54% surge as of Tuesday’s close.
“In the last quarter, margins went through the roof,” said Joseph George, industry analyst at India Infoline in Mumbai.
“Expectations had gone up, people were factoring in 17, 18% long-term, and today they came crashing down,” he said, adding that he did not expect the stock to fall much further.
JLR chief executive officer Ralf Speth said at the results briefing on Tuesday he expected Chinese demand to increase further this year, but analysts are expressing some doubt.
“Macro headwinds in Europe and the slower-than-expected ramp-up at China are likely to impact JLR’s volumes in 2012-13,” Standard Chartered said in a note.