Tata Motors recovers 5% from day's low as analysts eye valuation comfort

Automobile behemoth Tata Motors fell up to 1.73 per cent to hit an intraday low of Rs 791.70 per share on Monday, November 11, 2024. However, Tata Motors’ share recouped losses and rose 4.98 per cent from day’s lows to hit an intraday high of Rs 831.20 per share. 

 

The recovery in the Tata Motors share price despite weak Q2 results, analysts believe, is due to valuation comfort.

 

G Chokkalingam, founder and head of research at Equinomics Research said, “The reason behind this recovery is valuation comfort as now the stock is relatively cheaper after several corrections. Other than this, there are no fundamental factors that may have pushed the stock higher. 

 

 

On the bourses, the scrip has dropped 13.5 per cent in the past month, and a little over 25 per cent in the past three months, BSE data showed.

 

Mumuksh Mandlesha, research analyst, Anand Rathi Institutional Equities suggests that Tata Motors' stock recovery can be attributed to the maintained FY25 JLR Ebit margin of 8.5 per cent, which indicates strong H2 with margin of 9.6 per cent, alongside improved demand cycles in the commercial vehicles (CV) and passenger vehicles (PV) industries. Additionally, after recent corrections, the stock's valuations now appear reasonable.

 

Brokerages trim target, estimates 

 

According to analysts at Nuvama, Tata Motors' Q2FY25 Ebitda fell 22 per cent below estimates due to lower revenue and higher discounts/marketing expenses in Jaguar Land Rover (JLR). 

 

Therefore, analysts have reduced FY25–27E Ebitda estimates by 10–20 per cent, adjusting for lower revenue and margin assumptions for JLR and Tata’s India Commercial Vehicle (CV) and Passenger Vehicle (PV) divisions.

 

They now forecast a revenue/Ebitda compound annual growth rate (CAGR) of 0 per cent/4 per cent for FY24–27E, down from 21 per cent/25 per cent for FY21–24. Additionally, JLR sales are expected to see a -3 per cent CAGR over FY24–27E due to a rundown in the order book and softening demand. However, India CV sales are expected to remain flat amid moderate infrastructure spending and competition from railways. 

 

Hence, analysts at Nuvama have maintained a ‘Reduce’ rating with a sum-of-the-parts (SOTP)-based target price of Rs 767 (previously Rs 1,010), lowering JLR’s EV/Ebitda multiple from 2.5x to 2x due to a weak demand outlook.

 

Those at Motilal Oswal said that Tata Motors reported a weak consolidated performance in Q2FY25. The decline, analysts said, was driven primarily by weaker JLR volumes and higher cost pressures, though the India business remained steady despite softer demand. 

 

While Tata Motors' management has reiterated its guidance for JLR despite facing several challenges, Motilal Oswal anticipates continued margin pressure for JLR from FY24 to FY27 due to weaker demand, increasing discounts, and a normalising product mix. The demand outlook in India’s CV and PV sectors also shows signs of moderation, analysts highlighted. 

 

As a result, Motilal Oswal analysts have reduced Tata Motors’ FY25/FY26 Ebitda estimates by 3 per cent/7 per cent. 

 

The stock currently trades at 15x FY25E/FY26E consolidated EPS and 6.5x/5.5x EV/Ebitda. Motilal Oswal reiterated a ‘Neutral’ rating with a slashed September 2026 SOTP-based target price of Rs 840.

 

Global brokerages echoed a similar sentiment. CLSA upgraded Tata Motors to ‘Outperform’ but lowered its target price to Rs 968 per share, while Jefferies maintained a ‘Buy’ rating with a revised target price of Rs 1,000 per share.

 

Q2 performance 

The automaker had announced its September quarter of financial year 2025 results on November 9.

 

In Q2FY25, the Mumbai-based company’s profit dropped 11.2 per cent year-on-year (Y-o-Y) to Rs 3,343 crore in Q2FY25, as against Rs 3,764 crore in Q2FY24. The company’s revenue from operations fell 3.8 per cent annually to over Rs 1.01 lakh crore in the quarter under review, from Rs 1.05 lakh crore in Q2FY24.

 

At the operating level, earnings before interest, tax, depreciation and amortisation (Ebitda) plunged 19 per cent Y-o-Y to Rs 12,159 crore in Q2FY25, from Rs 13,769 crore in Q2FY24. Consequently, Ebitda margin squeezed 110 basis points annually to 12 per cent in the September quarter of FY25, from 13.1 per cent in the September quarter of FY24. 

 

JLR Q2 show  

In Q2FY25, Jaguar Land Rover (JLR) reported revenue of £6.5 billion, down 5.6 per cent, with an Ebitda margin of 11.7 per cent, a decline of 320 bpss, and an Ebit margin of 5.1 per cent, down 220 basis points. Profit before tax (before exceptional items) stood at £398 million. Tata Motors noted that profitability was affected by a temporary aluminium supply shortage and a hold on 6,029 vehicles for additional quality checks. However, production and wholesale volumes are expected to see a strong recovery in the second half of the year.

 

Meanwhile, JLR’s full-year guidance remains steady, with expected revenue around £30 billion, an Ebit margin of at least 8.5 per cent, and a goal to achieve a positive net cash position.

 

According to PB Balaji, group chief financial officer, the growth in the quarter was impacted due to major external challenges as highlighted earlier. Overall, the business fundamentals remain strong, and we remain focused on our agenda of driving growth, competitiveness and free cash flows. 

 

Balaji opined, “As the supply challenges ease and demand picks up, we are confident of steady improvement in our performance and delivering a strong H2.” 

 

Cautious outlook

 

On the outlook, the company remains cautious on near-term domestic demand. However, the festive season and substantial investments in infrastructure should help bolster it. JLR wholesales are expected to improve sharply, as supply challenges ease. Overall, Tata Motors’ expect an all-round improvement in performance in H2FY25 and the business to become net debt free by this year.