JLR announces price cut for 3 models sold in China

TATAMOTORS was the biggest loser on Friday on account of Jaguar Land Rover (JLR) taking price cut for three of its top end variants: the Range Rover, Range Rover Sport and the F-Type sold in the Chinese market.

JLR announced a 5-10 percent voluntary price cut across the board in response to a probe made by the Chinese decision making body National Development and Reform Commission (NDRC). NDRC had initiated some investigations into corporate price rigging, as well as monopoly practices on claims that some of the foreign car makers like JLR were overcharging Chinese customers.

Analysts say price cuts are a concern given the importance of profitability in China for JLR’s overall margins. However, there has been no confirmation from the JLR management. China remains a very important geography for the company. More than 25 percent of JLR’s volumes and 40 percent of its revenues come from the Chinese market. Moreover, the models in which the price cuts were taken contribute about 35 percent of the revenues.

Citi believes this creates an overhang in the short-term for the stock. There is uncertainty until the intent behind the ruling is complete understood. However, there is limited financial impact, given China’s structure expect an impact of 5 percent on FY14, JLR profits and the estimated impact of 100 million pounds post tax on 15,000 units of JLR, so it’s a limited financial impact according to them.

Macquarie maintains outperform. They have a 12-month target price of Rs 540. The 5 percent decline seen in the stock price on Friday is a good buying opportunity for Tata Motors. The total impact on JLR’s EBITDA is 1 percent and this was long coming because the average selling price in China is double that of how much JLR sells in the other market. Therefore, it was about time that they reduced prices. Edelweiss says that the worst-case scenario indicates a 4 percent impact on EBITDA and a 6 percent impact on the profitability. They have lowered their FY16 consolidated earnings per share (EPS) but they have maintained a buy with a target price of Rs 517.