Tata Motors shares tank 8.6% on downgrades

The second consecutive quarter of poor results and lower target prices by brokerages led to an eight per cent fall in Tata Motors stock price to Rs 381. 

The reason for the poor June quarter show was forex losses to the tune of £454 million and lower than anticipated volume support from flagship subsidiary — Jaguar Land Rover (JLR). During the course of Thursday’s trade, the stock hit a 52-week-low of Rs 376. 

Analysts from CIMB, Phillip Capital, Elara Capital and Antique Stock Broking reduced their target price on the stock by 15-18 per cent. 

However, apart from Morgan Stanley and Phillip Capital, who have downgraded their rating on the stock, the rest have retained their recommendations, albeit with significantly lower target price.

Few analysts feel that with JLR's performance becoming unpredictable, hiving it off as a separately listed entity may help. In fact, much of the downgrade post the Q1 results were on account of JLR’s lower earnings before interest, depreciation, tax and amortisation margin, which came at 7.9 per cent, lowest in years. Analysts also suggested that forex losses would continue and gradually peter out by the end of FY18. And all these may keep financial performance under pressure.

Meanwhile, Tata Motors’ consolidated operating profit margin came at 9.4 per cent in the June quarter, versus 11.9 per cent a year-ago, weakest in recent times. 

As some of the margin pressure for JLR, such as higher marketing spends, limited room for a price hike and unfavorable product mix, may stay for most of FY18, analysts at Elara Capital reduced JLR and consolidated operating profit by 9-10 per cent over FY18 and FY19. 

Those at Phillip Capital marginally tinkered JLR’s volume expectations, but steeply downsized JLR’s margin expectations for FY18 and FY19 to 10 per cent and 13 per cent, as against earlier estimates of 12.9 per cent and 14.7 per cent, respectively. 

Nonetheless, for now, 19 out of 26 analysts — polled on Bloomberg after the Q1 results — have a ‘buy’ rating on the Tata Motors stock. However, with JLR accounting for nearly 70 per cent of Tata Motors’ sum-of-the-parts valuation given JLR’s relevance to the consolidated results, another quarter of slip may tempt some to change their stance.