Here is why CLSA expects Tata Motors' stock to outperform going ahead

Tata Motors: CLSA expects a sharp uptick in volume in FY24 driven by a strong order backlog

One of the pressing concerns with Tata Motors has been the slowdown in Jaguar Land Rover sales. However, global brokerage CLSA believes easing chip supply, going ahead, could be a key catalyst for volume growth for JLR, which, in-turn, will support Tata Motors’ stock.

JLR’s retail sales declined by 36 per cent to 79,008 units in the fourth quarter of 2021-22 fiscal (Q4FY22) as compared with the same period last year.

Jaguar sales for the period under review stood at 14,574 units, down 38 per cent from the year-ago period. Land Rover retail sales declined year-on-year by 36 per cent at 64,434 units.

Retail sales for the fiscal year ending March 31, 2022 were 3,76,381 units, down 14 per cent as compared to the fiscal year ending March 31, 2021.

For the month of April, CLSA expects overall retail sales to have declined by 33 per cent year-on-year (YoY).

"As per our estimates, BMW/Mercedes' retail volumes performed better than JLR in April (down 28 per cent each YoY) while the decline in Audi’s volumes was steeper comparatively (down 42 per cent YoY)," it said in a report dated May 24.

In China, JLR’s retail volume decline of 39 per cent YoY was better than peers as Audi, Mercedes, BMW, and Tesla reported declines of 63 per cent, 42 per cent, 49 per cent, and 86 per cent, respectively, in April 2022.

"However, China's volumes were hurt by Covid-related restrictions during the month. In the EU and the US, JLR continued to underperform with a steeper decline in volume on a YoY basis as compared to peers," CLSA added.

However, going ahead, CLSA sees the situation improving for JLR. Here’s why:

Easing chip shortage: The brokerage expects a sharp uptick in volume in FY24 driven by a strong order backlog. It pegs JLR volume (including China JV) to reach 369,000 units in FY23 and 434,000 units in FY24.

However, it warned that these estimates could be under threat if the chip shortage does not ease significantly as JLR has not been able to manage the supply issue as some of its peers have.

Strong pricing power: While commodity inflation is expected to ease a bit in the near term on the expectation of continued softening in steel prices, CLSA believes benefits for JLR would most likely accrue in FY24 as current commodity hedges roll over.

"We believe OEMs would retain the benefits and expect pricing to remain strong for JLR on the back of a healthy order book of 168,000 units at the end of Q4FY22 and lower incentives," it said.

Given this, the brokerage maintains an ‘outperform’ rating on Tata Motors with an unchanged target price of Rs 480, based on Rs 223 per share value to commercial vehicle business, Rs 104 per share value to JLR, and Rs 146 per share value to domestic passenger vehicle business.

Shares of Tata Motors fell 3 per cent to Rs 404 apiece on the BSE in Thursday’s intra-day trade. In comparison, the benchmark BSE Sensex was down 0.5 per cent at 10:50 AM.