Indian automobile company Tata Motors (NYSE:TTM) acquired British car maker Land Rover in 2008 from Ford Motor Company (NYSE:F), along with the Jaguar business. Following the acquisition, sales for the luxury sports utility vehicle (SUV) maker Land Rover dropped below the previously achieved 200,000 mark. In 2007, the automaker had sold 226,395 vehicles, but volume fell to only 144,371 in 2009, the first full year under the ownership of Tata Motors. However, since then, volumes for the brand have witnessed double-digit growth in each consecutive year. Unit sales rose 15% year-over-year to nearly 350,000 for Land Rover in 2013. With China growth in sight, in view of increased investments and production expansion, and rising popularity of crossover vehicles, we expect Land Rover to cross annual sales of 700,000 units by the end of this decade.
Our price estimate for Tata Motors is $33.11, which is roughly 13% lower than the current market price. Land Rover constituted 60% of net revenues last year, and according to our estimates, forms almost three-fourth's of Tata's valuation.
Growth Potential Of The Luxury Vehicle And Crossover Market
According to a study by KPMG, the premium segment will constitute 15% of developed car markets by 2020, up from 13% in 2013.  However, most of the growth in the global market is expected to come from emerging economies such as China, India and Brazil, driven by a rising proportion of higher income groups in these countries. Along with the rise in luxury vehicle sales, the crossover SUV market has seen a surge in sales in recent years. Crossover volumes globally are expected to increase to 20 million by 2018, up from 15 million in 2013, according to Ford's marketing boss.  Most of this growth is anticipated to come from international markets, those outside North America. Crossovers have become popular as they provide both the functionality of a utility vehicle and the comfort and design of a car. The Rand Rover Evoque, a compact luxury crossover SUV, is Land Rover's best selling model. The model sold nearly 123,000 units in fiscal 2014 ending March, forming 35% of the brand's net sales.
Land Rover Eyes China Growth
China is the largest market for Land Rover, constituting one-fourth of the net volumes last fiscal. In fiscal 2010, China formed only 9.5% of the unit sales. Tata Motors was previously present in China as a wholly foreign-owned enterprise, but entered into a joint venture with the Chery Automobile Company in October 2012, as part of a 10.9 billion RMB investment, to jointly produce and distribute vehicles in the country. Production of the first SUV built under this partnership is set to begin by the end of this year, which will not only increase Land Rover's reach and availability in the region, but will also help the automaker evade the country's 25% import taxes. Apart from reduced costs, this move will enable Land Rover to compete with established competitors in China such as BMW, Daimler AG, and Toyota on a pricing front, as its vehicle prices are expected to fall by 15% on account of local production.  The manufacturing plant in China will produce around 130,000 vehicles annually by next year. Retail sales for Jaguar Land Rover in China stood at 103,077 units last fiscal year ending March.
Production In India Will Reduce Costs
Jaguar Land Rover already assembles two models at its plant in Pune, India. The automaker will now begin assembling the XJ sedan in the country and follow it up with production of the Range Rover Evoque. The company sold 2,913 vehicles in India in 2013, up 22% year-over-year, and aims to gain from the untapped growth potential of the country's luxury vehicle market in the coming years.  Although the luxury market represents a tiny portion of the Indian passenger vehicle market at present, the segment grew 15% last year despite the fall in overall market volumes. With increasing disposable incomes and a rising proportion of high income groups in India, premium vehicle sales could grow at a rapid pace. The population of high net-worth individuals (individuals with investable assets of $1 million or more) in the country was over 200,000 in 2012, and is expected to grow seven-fold by 2020 to 1.5 million.  The Range Rover Evoque is presently imported in the country, and cumulative taxes of ~170% are levied on the SUV. Local assembly units will help evade hefty import taxes and subsequently lower vehicle prices, possibly boosting demand for Land Rover in India. In addition, lower operational costs in the country will bolster profitability for the company, going forward.
Disclosure: No positions.