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Tata Motors shares rebound from 2018 slump on Jaguar Land Rover hopes

Investors are betting on a recovery in Chinese demand for the luxury brand

Tata Motors presents its Altroz at the Geneva International Motor Show on March 5.   © AP

MUMBAI (NewsRise) -- Tata Motors, the worst-performing stock in India's benchmark Sensex index last year, is rebounding as investors bet on a recovery in demand for the automaker's Jaguar and Rover luxury vehicles in its largest market of China.

Investor hopes have been kindled by Beijing's move to offer incentives to Chinese consumers to buy cars after the world's largest automobile market last year contracted for the first time in more than two decades. Auto sales including passenger and commercial vehicles fell 2.8% to 28 million units in 2018, according to data from the China Association of Automobile Manufacturers.

In January, China's top planning agency, the National Development and Reform Commission, announced a raft of measures, including the loosening of curbs on the secondhand auto market and subsidies for rural consumers and buyers of electric vehicles. According to a Bloomberg report on Tuesday, China is planning to cut the value-added tax that covers the manufacturing sector by 3 percentage points to 13%, giving a further fillip to the slowing domestic consumption.

Shares of Tata Motors have risen 9.2% so far this year after a 60% decline in 2018 that made it the worst-perming Sensex stock. The benchmark index has advanced 1.6% during this period. The stock had been badly bruised by successive quarters of losses at Tata Motors as its British unit Jaguar Land Rover grappled with multiple challenges across geographies.

Tata Motors acquired the luxury automaker from Ford Motor in 2008 for $2.5 billion. JLR accounts for more than half of the company's revenue and nearly 90% of its operating profit.

Last month, Tata Motors reported the biggest ever quarterly loss in Indian corporate history of about $4 billion, weighed by JLR's shrinking China sales. The company also warned that JLR would swing to an operating loss in the year ending in March as against its previous prediction of breaking even.

Tata Motors stock has gained despite a lowering of guidance during the third-quarter earnings as sentiment on China turned positive and the company's founders bought its stock, Morgan Stanley said in a report on Wednesday. The group's holding company Tata Sons has raised its stake in the company to 38.4% from 37.3% at the end of 2018.

Sales of Jaguar Land Rover have also improved. In February, JLR saw its sales in North America jump 26% on the back of a surge in incentives, while new registrations in the U.K. surged 14%.

Still, uncertainties linger in major markets in Europe, including in the U.K. The uncertainty over a Brexit deal has disrupted the production schedule at Britain's largest carmaker.

For the stock to rerate, JLR needs to exhibit stable and positive free cash flows, Morgan Stanley said. This can be achieved either by strong internal cost cutting and a China rebound, or the company ties up with another player to share capital expenditure spending, it added.

Earlier this week, a Bloomberg report said, citing sources, that Tata Motors is exploring strategic options for the JLR unit, including a potential stake sale. The company denied any stake sale.

Some analysts warn that the stock is likely to remain under pressure. JLR is witnessing a deluge of operational challenges beyond the weakness in volume, CLSA said Wednesday. Its capacity expansion the past two years has far outpaced volume, which is hurting utilization and will be a continued drag on profitability, it warned.

The brokerage retained its Sell rating on the stock, citing insufficient near-term product triggers at JLR and the impending downturn at Indian trucks market.

Tata Motors shares ended 2.8% lower in Mumbai trading on Wednesday, while the benchmark S&P BSE Sensex closed 0.5% up.

--Dhanya Ann Thoppil

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