Mumbai: The Brexit deal euphoria that ignited Tata Motors Ltd’s stock on Thursday seems to have ebbed. Shares of the global auto giant eased by 2% on Friday, shedding a part of the 13% gain clocked the previous day.
To be sure, the news brings a huge relief for investors when investors were fearful of a “no-deal Brexit". A “no-deal Brexit" would imply uncertainty on customs duties when goods are moved between the United Kingdom and countries in the European Union (EU). It would have put Jaguar Land Rover Ltd., the 100% subsidiary of Tata Motors at a disadvantage on vehicles exported from UK to EU nations.
After all, about a fifth of JLR’s sales accrues from European markets. Meanwhile, there is pessimism on global auto markets, both on consumption and excess capacity.
A Brexit deal therefore, puts the uncertainty to rest. Some analysts reckon that it negates the risk of 10-12% duty that was anticipated on finished goods exported from UK. Duties would have made JLR vehicles more competitive when exported to European nations. As such, the cost of production in the UK is among the highest, globally.
According to Jigar Shah, ceo of Maybank Kim Eng. Securities India Pvt. Ltd, “Duties on goods shipped between the two regions may still be imposed. But a Brexit deal would mean that the rules of trade would be set, leaving no uncertainty." Meanwhile, set terms of trade would alleviate fears of administrative issues between the two regions, while conducting trade.
Yet, it may not be time to cheer still. The details of the deal and its impact also on currency movements would determine profitability of JLR’s operations in UK.
That apart, Tata Motors’ has hit a hard patch in both domestic and international markets. JLR’s China sales have improved for three months in a row after about 15 months of sharp decline. This may pull up overall sales of JLR during Q2FY20, although the developed markets are still facing a slowdown in passenger car sales.
In domestic markets, Q2FY20 commercial vehicle sales have seen the worst contraction in a decade. A weak growth in gross domestic product and the transition to BS-VI norms that will hike truck prices are likely to keep CV sales in the downcycle for few more quarters.
As a result of weak fundamentals, analysts have pencilled a consolidated net loss in excess of ₹1,000 crore for the quarter. This will weigh on the stock's performance. Also, investors must brace for some volatility on Monday as the weekend may unveil details on the Brexit deal.