Launch triumphs, JLR margin turn the ignition key to gains for Tata Motors

Some brokerages foresee growth via higher market share, prices, margins

The restructuring of domestic operations over the next year, coupled with new launches, increased sales at subsidiary Jaguar Land Rover (JLR), and continued deleveraging, are pivotal factors propelling automotive giant Tata Motors forward.

Momentum in sales volume is expected to be a major driver for the company. JLR’s April-June quarter sales surpassed expectations, showing a 5 per cent year-on-year (Y-o-Y) increase, with retail sales up by 9 per cent.

The sales mix at JLR has also been favourable, with the higher-margin Range Rover, Range Rover Sport, and Defender models accounting for 68 per cent of total volumes.

In contrast, the domestic passenger vehicle (PV) business saw an 8 per cent Y-o-Y decline in June, falling short of estimates. Tata Motors has actively adjusted wholesales to manage channel inventory amidst weak retail demand.

Nomura Research sees significant medium-term growth driven by market share expansion, higher average selling prices, and improved margins.

Tata Motors aims to increase its market share to 18–20 per cent by 2029–30, up from 14 per cent in 2023-24 (FY24), leveraging its current portfolio and upcoming launches to outpace industry growth rates of 6-7 per cent.

Currently addressing 53 per cent of the PV market with a 26 per cent share, Tata Motors targets expanding its addressable market to 80 per cent with upcoming launches such as the Curvv and Sierra, filling product gaps in the midsize sport utility vehicle segment.

The company also plans to introduce a compressed natural gas variant of the Nexon and electric versions of the Harrier and Safari.

For its internal combustion engine PV business, Tata Motors aims to enhance cash flows and achieve double-digit operating profit margins.

In the electric vehicle (EV) segment, the company targets operational break-even by 2025-26.

The demerger of the commercial vehicle (CV) business is expected to unlock shareholder value, as Tata Motors perceives limited synergies between the CV and PV segments.

Even as the CV business is spun off, significant synergies within the PV and EV segments are expected across the group’s portfolios, benefiting both domestic operations and JLR, particularly in technology advancement. While the PV business remains with the core company, the CV segment is slated for demerger into a separate entity within the next year.

In the CV business, Tata Motors aims for gradual market share growth, double-digit operating profit margins, expansion in non-vehicle businesses, and a free cash flow (FCF) representing 6-8 per cent of revenue, promising a strong return on capital employed (RoCE).

Looking ahead for JLR, Tata Motors targets long-term revenue scaling from £29 billion in FY24 to £38 billion, aiming for a 15 per cent margin (up from 8.5 per cent in FY24) and a targeted FCF of £3 billion.

The launch of three new EV products in 2024-25 (FY25) — Range Rover Electric, Jaguar Electric, and the first EV on the electrified modular architecture platform — is expected to drive revenue growth.

The company has revised its investment guidance to £18 billion over FY24 through 2027–28, up from £15 billion, due to increased investments in the EV business.

However, some brokerages maintain a cautious outlook on the stock.

Analysts, including Aniket Mhatre from Motilal Oswal Research, acknowledge Tata Motors’ robust performance in FY24 across key segments but caution about potential headwinds ahead, particularly at JLR. They highlight rising cost pressures from demand generation, normalisation of product mix, and EV ramp-up as potential margin-dilutive factors.

Nomura Research suggests that further stock rerating depends on the success of new EV models and the ability to sustain JLR margins.

Meanwhile, analysts at Elara Research, led by Jay Kale, note that JLR’s ambitious long-term margin target of 15 per cent hinges on market acceptance of its EV products, amid global concerns over EV profitability.

With net debt concerns addressed, Tata Motors’ focus on achieving a RoCE target of 22 per cent or more in FY25 is seen as positive and could act as a catalyst, despite muted near-term demand and a cautious FCF outlook for the first quarter.