Tata Motors may see major re-rating amid apparent recovery in CV biz

Strong rebound likely over the next two years could boost sentiment

Tata Motors seems to be receiving Buy recommendations from various analysts. The near-term is likely to remain challenging for all automobile manufacturers due to a combination of supply chain issues and high fuel prices. However, there seems to be a recovery in commercial vehicle (CV) sales, given improved economic activity feeding greater demand for CVs.

Semiconductor shortages will continue to hamper production and rising metals prices remain a concern which could impact margins – this situation may not ease until the Ukraine War ends. In the medium to longer term, Tata Motors could benefit from both cyclical upturns as well as a thrust into the electrical vehicle (EV) space where it is well-placed to get market share in the new segment.

Quarter-on-quarter (QoQ), in March 2022 quarter (Q4) the domestic business of Tata Motors has seen sales unit volume gains of over 20 per cent across both passenger and CV. This should translate into 25 per cent or so gains in top-line. The JLR revenues are likely to rise by 15 per cent or more due to better production numbers.

Although volumes for JLR still remain under-par, there’s a strong order book. Based on differences between retail and wholesale sales numbers, there could have been an inventory build-up in Q4 but this should be largely liquidated over the next two quarters given the order book. The analyst consensus is that JLR can register some free cash flow in Q4, while the domestic Indian business should be profitable.

Most analysts have cut EBITDA estimates for 2022-23 given conservative volume assumptions and margin pressures. However, while fiscal 2021-22 is expected to end with net losses across all segments and consensus expectations of Rs 9,100 crore of consolidated losses over Rs 2.83 trillion of revenues, analysts are also estimating a turnaround with consolidated PAT of Rs 4,750 crore on Rs 3.37 trillion of revenues in 2022-23.

If this is the point when a cyclical recovery starts and the extraordinary supply chain issues start to ease, profitability in 2023-24 could more than triple to around Rs 15,000 crore. At consolidated EBIDTA levels, margins are expected to rise by around 150-200 basis points in 2022-23 and by another 250-300 basis points in 2023-24 over 2022-23. This would mean a CAGR of better than 20 per cent for consolidated EBITDA over the next two fiscals.

Using sum-of-the-parts valuations, Tata Motors may be worth somewhere between Rs 470- 530 per share depending on the specifics of these assumptions. The current market price is around Rs 431, up 4.8 per cent through the last month and up 50.5 per cent in the last year.

While there’s an apparent upside due to the likely turnaround, there has also been investment support based on that assumption if we note the strong gains in share price. So some of that expected return to profitability is already reflected in the share price.

However in highly cyclical stocks, the share price can move 3x from the bottom of the cycle to the peak. Also, the events of the last three years have been extraordinarily negative, so there could be a bigger rebound, if there is genuine visibility of easing supply chain problems.