Tata Motors shares drop after China troubles hit profit

Tata Motors shares fell more than 5% on Wednesday after a surprise drop in its bottom line. It was hit by weak demand for luxury Jaguars and Range Rovers in China, where automakers are under pressure to cut prices.

India's biggest automaker by revenue reported a 56% drop in its March quarter net profit on Tuesday and scrapped its dividend payment for the first time since 2002.

Early signs of a turnaround in its India business were overshadowed by trouble in China, where Tata's profitable Jaguar Land Rover division has been hit by weak overall demand and a newfound reluctance to flaunt wealth. Jaguar Land Rover accounts for more than 80% of Tata's revenues.

Tata was one of the biggest losers on the Nifty, with shares touching their weakest level since December.

"We remain confident of the imminent turnaround in domestic business, however weak pricing environment in China is a concern and likely key to stock performance", analysts at Jefferies said in a morning note.

Under pressure from official campaigns, automakers such as General Motors and Ford Motor Co have cut prices or increased discounts on vehicles sold in China to counter slow economic growth - a move some analysts say is unlikely to be reversed any time soon.

Analysts said China, which has buoyed Tata in the past, is weighing on margins as the group begins to pay out higher incentives to dealers in the country, squeezing profits even if it can increase volumes.

"These numbers are much worse than expectations", G Chokkalingam of Equinomics, a Mumbai-based research and fund advisory firm, said of the group's fourth quarter.

"The margin pressure has come from (Jaguar Land Rover). That is surprising, and one has to wait for one or two quarters to understand if they can improve margins", Chokkalingam said.