Analysts bet on TaMo's India biz as JLR Q2 sales disappoint; stock dips 5%

Shares of Tata Motors (TaMo) dipped nearly 5 per cent at the bourses on Monday in intraday trade to hit a low of Rs 393.70 on the BSE, after the company's subsidiary – Jaguar Land Rover (JLR) – reported lower-than-expected wholesale numbers for the second quarter of the current fiscal (FY23) at 75,307 units.

JLR's retail sales for the recently concluded quarter, meanwhile, came in at 88,121 units, an increase of 9,296 units, or 11.8 per cent higher when compared with the June 2022 quarter. Year-on-year (YoY), the retail sales are, however, 4.9 per cent lower.

JLR has attributed this performance to a lower than expected supply of specialised chips from one supplier, which could not be readily re-sourced in the recently concluded quarter. That said, the company hopes the situation will improve in the remaining half of FY23.

Following the development, global brokerage JP Morgan downgraded the stock from "overweight" to "neutral" with a September 2023 price target of Rs 455.

“While the miss is driven by the supply chain, the delay in free cash flow (FCF) generation increases the risk to JLR's debt reduction targets. Net addition to the order book in the September 2022 quarter at 5,000 units was slower than the 32,000 units in the June 2022 quarter,” wrote Amyn Pirani and Vaibhav Zutshi of JP Morgan in a recent note.

Silver lining

A silver lining for Tata Motors, however, is the company's India business, which Pirani and Zutshi said could support the stock price going ahead. They value TaMo's commercial vehicle / passenger vehicle EBITDA margins at 6 per cent / 6.5 per cent (+60 basis points / +40 basis points) QoQ.

“We expect balance-sheet deleveraging to continue, but at a slower pace. We now forecast consolidated net debt to decline from Rs 487 billion in FY22 to Rs 16 billion by FY25 (earlier net cash estimate of Rs 48 billion). We forecast JLR's FY25 net debt at GBP312 million versus net cash expectation of GBP500 million. India business should turn to net cash by FY24 due to strong operating performance and TPG's investment in electric vehicles (EVs),” the JPM note said.

Back home, TaMo launched an electric variant of one of its best-selling hatchback, Tiago, in the last week of September 2022. Most analysts gave a thumbs-up to the development with those at Jefferies expecting the TaMo's stock to hit Rs 650 levels in their best-case scenario.

Analysts at Nomura expect, on the other hand, expect the Tiago EV to sell 3,000 – 5,000 units per month, and its overall EV sales to touch 60,000/ 96,000 in financial years 2023 and 2024 (FY23 and FY24). Every 1 per cent market share gain in passenger vehicles (PVs), they said, has the potential to add around Rs 50 billion to TaMo's market-cap. “We maintain our ‘buy' rating and SOTP-based target price of Rs 520. The stock is trading at 4.3x FY24 EV/EBITDA (enterprise value/earnings before interest tax, depreciation and amortisation),” Kapil Singh and Siddhartha Bera of Nomura wrote in a recent note.

Pirani and Zutshi, meanwhile, value TaMo's India business at Rs 355 a share (12x EV/EBITDA) versus Rs 322 a share earlier. “We cut JLR's valuation to Rs 98 a share versus Rs 203 per share earlier due to lower earnings and multiples (6x PE vs 8x earlier). Continued chip shortages are a downside risk. Faster recovery in JLR volumes is an upside risk,” they said.