Tata Motors shares slip on China fuel norms

Shares of Tata Motors dropped more than 5% shortly after trading opened on Thursday, on fears the new fuel economy norms announced by the Chinese government would impact its subsidiary Jaguar Land Rover (JLR).

China, which contributes around 20% of JLR’s revenues and nearly 40% of its operating profit, on Wednesday put out strict rules for automobile companies to cut fuel consumption down to 6.9 litre per 100 km by 2015 and further to 5 litre by 2020.

The shares recovered some ground to close the day at `273.75, still down around 4.2%.
The market’s apprehension is that the luxury car maker will have to invest further to meet the stringent fuel economy norms.

“In our view, 50% of sales in China would be compliant with the new norms by 2015. For the rest, the company may have to do capex to make them compliant. Overall, negative development for JLR,” Morgan Stanley said in a note.

“The new Range Rover is meeting the new norm, thus we can expect the new RR sport and the new Discovery also to meet the new norms. These three will help them lower fleet average as they formed 35% of 2012 China sales. Evoque, XF and current Freelander don’t meet these norms. JLR needs to lower fuel efficiency by about 10% across these models,” the brokerage noted.

JLR, which is in the process of launching new models globally, recently increased its capital expenditure guidance upwards to £2.75 billion from £2 billion, to develop new products and technologies for meeting customer and regulatory requirements. It warned of a possible negative free cash-flow in FY14 owing to the increase in capex.

However, Tata Motors allayed the fears, with a spokesman saying it “has been expecting the publication of the final ruling by the Chinese government and has been taking necessary product and technology actions to comply with its legislative obligations.”

Some of the new technologies the company will utilise to reduce fuel consumption and to deliver its CO2 reduction strategy are light-weighting through aluminium technology, engine downsizing, stop-and-start technology, 8-speed transmission and a new 9-speed transmission to be launched on Range Rover Evoque. A family of all-new low-emission 4-cylinder JLR petrol and diesel engines is under development and advanced diesel technology including diesel hybridisation is expected to be available on Range Rover by mid-2013, the spokesman said.

@Yugac