An expected rise in the demand of commercial vehicles and increase in JLR sales are likely to boost the positive sentiment.
The demand for its commercial vehicles (CV) segment is strong, paralleling the uptick in industrial production. Analysts expect sales to grow over 15 per cent, as truck freight rates improve and operators replace older vehicles. Sales of Light CV are expected to increase faster than truck sales, with most new launches catering to the demand.
Tata Motors is running at 65 per cent utilisation of its truck and car manufacturing capacities and about 90 per cent of its LCV (mainly Ace) capacity. Thus, it has adequate capacity to leverage the increasing demand, with the ability to increase Ace production by 20 per cent if it adds a third shift at its Uttaranchal facility, according to the Daiwa report.
Even after two price hikes earlier this year (1.2 per cent each in April and June) and another planned in October, earnings before interest, tax, depreciation and amortisation (Ebitda) margins are expected to come under pressure. The company is expected to absorb some part of the five-per-cent increase in costs due to the changeover in emission norms in October. Additionally, resurgence in input costs may also hurt margins.
On the JLR front, Tata Motors expects a capex of about £800 million over the next two years, which may increase with a changeover in emission norms in Europe (due in 2012). The stock has appreciated 76 per cent over the past one year, but analysts believe there is still some wind in these sails derived by the expected uptrend in the CV demand and JLR sales growth.