Tata Motors: Analysts see up to 66% upside despite chip supply constraints

Shares of Tata Motors recovered 4 per cent from lows on Wednesday after the company scheduled an analysts' call later today to address the concern

Analysts tracking Tata Motors continue to see up to 66.5 per cent upside in the stock as they opine the concerns over deepening of semiconductor shortage are “misplaced” and are only “near-term headwinds”. 
 

Investors dumped shares of the Tata Group firm on Tuesday after the company’s UK subsidiary Jaguar Land Rover (JLR) warned of lower earnings on the back of semiconductor shortage in the September quarter of the current financial year. 
 

“Given the supply constraints, the company expects to report a cash outflow of about £1 billion with a negative EBIT margin for the quarter. Total liquidity at the end of the first (June) quarter was over £5.6 billion including a £1.9 billion undrawn committed credit facility (RCF),” Tata Motors said. The company had earlier guided for earnings before interest and tax (Ebit) margins of over 4 per cent and a free cash flow (FCF) breakeven.
 

Following the development, the shares hit 10 per cent lower circuit (Rs 311.45) on Tuesday but erased some losses to close at Rs 316.95 apiece, down 8.41 per cent on the BSE. This translates into a market cap loss of Rs 9,663 crore on Tuesday. 
 

The sell-off extended further on Wednesday as the shares fell another 3.4 per cent to hit a low of Rs 306 on the BSE in the intra-day trade. The scrip later recovered 3.5 per cent from lows and ended unchaged at Rs 317, ahead of the company's analyst call later in the day.


 

However, according to Nishant Vass and Pratit Vajani, research analysts at ICICI Securities, chip shortages remain a dynamic situation and difficult to forecast in the short-term due to the unique nature of the semi-conductor supply chain.
 

“Most global OEM’s (e.g. Ford, GM, Daimler) have witnessed similar chip shortages which has disrupted CY21 production schedules as capacity remains tight. We do not believe this to be lost sales as peers also don’t have significant surplus capacity to benefit,” they said in a report dated July 7.

Those at Motilal Oswal Financial Services, too, concur with the view and expect the company to continue to prioritize the production of higher margin vehicles for available chip supply as well as make chip and product specification changes wherever possible to reduce the impact.

“From a long-term perspective, all three businesses of Tata Motors are in recovery mode. While the India CV business would see a cyclical recovery, the India PV business is in a structural recovery mode. JLR is also witnessing a cyclical recovery, supported by a favorable product mix,” Jinesh Gandhi, research analyst at the brokerage, noted in his report.
 

Nonetheless, analysts have revised their earnings forecast to factor in near-term supply constraints. Emkay Global, for instance, expects some dispatches to spill over from FY22 to FY23 due to near-term production constraints. 
 

“For JLR (excluding China JV), we cut FY22E volume by 8 per cent and increase FY23E volume by 4 per cent. As a result, we reduce consolidated FY22E EBITDA by 9 per cent and increase FY23E EBITDA by 3 per cent,” they said in a stock update report.


 

Gandhi of MOFSL, meanwhile, has lowered FY22E consolidated earnings per share (EPS) estimate by 40 per cent (from Rs 23.4 to Rs 14), but left it largely unchanged FY23E.
 

“Currently, we are building in EBIT margin of 5.4 per cent in JLR for FY22E. However, if we bake in the company’s guidance of lower volumes in Q2FY22, negative EBIT margin in H1FY22, and strong recovery in volumes from Q3FY22, we see a potential downside risk of 5 per cent to our FY22 volume estimates for JLR, which could result in 20 per cent cut to our FY22 EBIT assumptions,” wrote Hitesh Goel and Rishi Vora, research analysts at Kotak Institutional Equities. 
 

In April-June quarter, JLR retail sales stood at 124,537 units with sales in China (+5% CAGR) and North America (+1% CAGR) witnessing higher volumes. Global retail orders stood at an all-time high of 110,000 units and dealer inventories are low at 20,000 units. Overall, the company reported a total domestic sales of 107,786 units in Q1FY22, marking a growth of 353 per cent year-on-year.

Source: Brokerage reports

Note: Upside from Wednesday's CMP of Rs 317