Demand, margin concerns likely to weigh on Tata Motors in near term

Tata Motors reported a strong performance in the April-June quarter (Q1) of FY25, but the company also issued caution over supply constraints. That led to a selloff in the stock. 

The Ebitda margin expanded 110 basis points (bps) year-on-year (Y-o-Y) to 14.4 per cent, better than estimated, driven by a good show from Jaguar Land Rover (JLR). But India's passenger vehicle (PV) business margin missed estimates.

Apart from subdued global demand and margin headwinds at its UK-based multinational auto subsidiary JLR, recent supplier-based constraints may be an issue in the near term. Coupled with demand moderation in its India commercial vehicle (CV) and PV businesses, this raises concerns about Tata Motors’ ability to sustain current levels of profitability.

Nevertheless, the prospects are good enough for analysts to marginally hike EPS estimates by 3 per cent or so for FY25. The stock trades at an estimated 19-20x of FY25 estimated EPS. 

 

Consolidated Q1FY25 revenues grew 6 per cent Y-o-Y to Rs 1,08,050 crore, with Ebitda up 14 per cent to Rs 15,510 crore and PAT rising 46 per cent to Rs 5,530 crore. All three numbers beat the street expectations. The company reported an Ebitda margin of 14.4 per cent and consolidated free cash flow (FCF) stood at Rs 1,200 crore (versus Rs 2,500 crore in Q1FY24). Net debt increased by Rs 2,600 crore in Q1FY25 to Rs 18,600 crore due to dividend payments and seasonality impact.

In JLR, volumes (including joint ventures) grew 4 per cent Y-o-Y to 110,500 units, slightly over expectation. Net realisation improved 0.5 per cent Y-o-Y and 4.3 per cent quarter-on-quarter (Q-o-Q) to GBP 74,400 per unit (around 6 per cent higher Y-o-Y). Ebitda margins contracted 50 bps Y-o-Y at 15.8 per cent despite a favourable product mix due to rising Marketing Expenses. However, Ebit (earnings before interest and tax) margin improved by 30 bps Y-o-Y to 8.9 per cent due to lower depreciation. 

In Tata Motors standalone, the CV business revenue grew 5 per cent Y-o-Y to Rs 17,850 crore, which was below consensus. Volume growth was 6 per cent Y-o-Y. The average selling price (ASP) declined 0.8 per cent Y-o-Y and 1.7 per cent Q-o-Q to Rs 1.91 million. The ASP decline was due to lower sales of medium & heavy CVs and due to a shift from multi-axle vehicles to tractor-trailers. But Ebitda margins expanded 220 bps Y-o-Y (down 30 bps Q-o-Q) to 11.6 per cent, due to lower raw material costs. 

In Tata Motors’ PV segment, revenue declined 8 per cent Y-o-Y to Rs 11,890 crore, with 1 per cent Y-o-Y decline in volumes and 7 per cent Y-o-Y decline in realisation per unit. Ebitda margins expanded by 60 bps Y-o-Y (down 150 bps Q-o-Q) to 5.8 per cent, with raw material cost reductions. Margin miss relative to estimates is due to higher discounts.

In guidance, management said the demand outlook for JLR is under pressure in markets, such as the EU and China. But North America is improving and demand in the UK is recovering. The current order book stands at 104,000 units vs 133,000 in the March 2024 quarter.

Variable and fixed marketing expenses are likely to increase as the company plans to invest in demand generation. JLR is expected to face incremental production constraints in the next six months due to floods at a key aluminum supplier. Management hopes to reduce the impact by sourcing from alternate suppliers. Overall, stable margin guidance is maintained for FY25 and management retains FY26 Ebit margin guidance of 10 per cent.

CV demand till July has been weak, but it is expected to bounce back in the second half of FY25. The India CV business may see a 4 per cent CAGR during FY24-26. In PVs, channel inventory is high at 35-40 days (vs 30 days normally). 

The Ebitda margin for ICE (internal combustion engine) vehicles stood at 8.5 per cent in Q1FY25 vs 8.6 per cent in Q1FY24. 

Margins could be further compressed by a combination of rising marketing expenses, normalising mix, and EV (electric vehicle) scale which will be initially low-margin. Demand moderation is also a concern. Hence investors turned cautious despite the good results.

According to Bloomberg, 16 of the 23 analysts polled post Q1 results are bullish, two have sell/reduce ratings and five are neutral on the stock with an average one-year target price of Rs 1,183.