Tata Motors’ stock is a direct proxy play on Chinese macro indicators like GDP, wealth effect, disposable income and the number of license plates issued.
Investors tend to view a stock that gives phenomenal returns before witnessing a sharp cut in its price as a good value proposition.
However, they need to understand that a company's stock price is directly linked to its expected earnings growth based on certain variables on that particular day.
Hence, a change in one of the variables that negatively affects its earnings and stock price the next trading day does not necessarily imply that the lower price should prove to be attractive to investors.
This phenomenon seems true for Tata Motors. After erosion of nearly a quarter of its value since the beginning of the year, brokerages consider it to be a 'screaming buy', given the steep correction.
However, one needs to have a clearer view on the Chinese economy for the next few years in order to confidently make such an assertion, because its subsidiary Jaguar Land Rover (JLR) gets a big chunk of its revenues from the Asian giant.
Unfortunately, if the Chinese government that supervises its entire gamut of affairs is unable to assess its own future growth prospects, for people in India to evaluate Chinese macros effectively seems an onerous task.
Tata Motors' stock is presently a direct proxy play on Chinese macro indicators such as GDP, wealth effect, disposable income and the number of license plates issued.
Prior to the June quarter, according to analysts' estimates, JLR derived nearly 30 per cent of total volume, 35 per cent of total revenue and 45 per cent of operating profit from the Chinese market and hence its role has gained prominence in assessing the company's earnings growth.
This is the reason for the correction in its stock price being sharper compared to other luxury brands such as BMW, Audi and Daimler as their exposure to the region is lesser in volume, though they sell more overall units.
JLR's sluggish China volume growth at the beginning of 2015 was perceived to be a supply bottleneck issue (its key product Evoque manufactured in China led to transition issues), but over a period of time it turned out to be an issue of constrained demand (i.e. the Chinese deferring their purchases of luxury cars).
This caused the double digit growth of the luxury car sales in China dropping to low single digits.
Another setback to luxury carmakers in China was that investors deriving stellar returns from the Chinese equities around March re-deployed surplus cash into equities and the market's subsequent collapse resulted in mass cancellation of bookings.