Tata Motors, M&M stocks see significant gains on improved demand outlook

While M&M closed at Rs 705.6 a piece, up 10.8 per cent - the highest in 18 months, Tata Motors' shares ended at Rs 173.6, a piece up 9.8 per cent-the highest in 33 months

It’s not very often that archrivals celebrate together, but Wednesday was an exception. Shares of Tata Motors and Mahindra and Mahindra (M&M) saw significant gains, touching record highs.
 
M&M shares closed at Rs 705.6 a piece, up 10.8 per cent, the highest in 18 months. A buzz on the Street that the company may put more loss-making subsidiaries on the block also added to the rally.
 
Tata Motors’ shares ended at Rs 173.6 a piece, up 9.8 per cent, the highest in 33 months. Apart from macro factors, including positive news on a Covid-19 vaccine, company specific factors, too, aided the rally, said analysts. A relatively lower valuation compared to peers also helped, they added. “After the unlock and positive development on the vaccine front, there is rotational trade and money is flowing out of pharma and IT stocks into old economy stocks like aviation and auto, leading to a rally,” said Aditya Makharia, analyst at HDFC Securities. The micro factors like a good festive season added to the rally, he pointed out.
 
In M&M’s case, strong volume run of tractors during the festive season and the company’s resolve to shut loss-making units reposed investors’ confidence. In a post-earnings investor call, the company’s management said it was on track to achieve an 18 per cent return on equity.
 
Investors have been taking note. Since the beginning of FY21, M&M stocks have gained 32.8 per cent, and it is up 6.2 per cent month-to-date. The company’s sharp focus on capital allocation, including the board’s decision to not invest in SsangYong, was an important and “signaled to our investors that we are serious about capital allocation,” Anish Shah, group chief financial officer and MD and CEO-designate of M&M, said recently.
 
TaMo affair
 
In Tata Motors’ case, its shares surged for the third consecutive day on Wednesday, and hit a nine-month high on expectations of improvement in demand outlook. It was trading at its highest level since February 17. In the past month, it has outperformed the market by surging 33 per cent, as against a 10 per cent rise in the S&P BSE Sensex. Despite the headwinds caused by the pandemic, both Tata Motors and M&M reported healthy operational performances in September quarter (Q2FY21) with margins advancing on the back of stringent cost control measures and benign raw material prices.
 
“We upgrade Tata Motors to ‘buy’ as the OEM will benefit from an improving demand outlook, cost-cutting initiatives, and better FCF generation,” wrote Makharia in a research report dated November 11.
 
JLR’s retail volumes are improving from Covid lows, and system inventories are normalising, it said, adding that it envisages double-digit volume growth at JLR over FY22/23E (12/11 per cent).
 
Meanwhile, the loss-making India passenger vehicle business has turned the corner and reported positive margin, driven by robust market share gains. This will improve domestic cash flows and make the PV business more attractive for potential partners, it added.
 
Analysts are also optimistic of a strong operational performance by M&M. Driven by positive rural sentiment, the upward trajectory continued in domestic tractors with growth of 18 per cent for M&M and 9 per cent for Escorts in October, according to an Emkay Global Research report.