JLR puts Tata Motors in slow lane

A meaningful turnaround in the JLR business will aid investor sentiment for Tata Motors stock. Photo: Bloomberg
A meaningful turnaround in the JLR business will aid investor sentiment for Tata Motors stock. Photo: Bloomberg


  • Demand for JLR products is strong, but paltry sequential rise in the order book disappoints.

A slower-than-expected volume ramp up in Jaguar Land Rover Automotive PLC (JLR), Tata Motors Ltd’s UK-based subsidiary, is a damper for investors in the company’s shares. In the September quarter (Q2FY23), the shortage of chips restricted JLR’s ability to meet wholesale volume guidance, excluding the joint venture with China, of 90,000 units. JLR sold just 75,307 units in Q2.

Moreover, the threat of a recession in Europe is a concern.

It helps that the chip supply agreements would bring some respite. Sales volume in the half year ended March, or H2FY23, are estimated to be about 160,000 units, which is higher by only 8.75% than H1FY23. Accordingly, JLR expects to breakeven at the free cash flow level in FY23 compared to the guidance of £1 billion earlier. It sees a positive Ebit (earnings before interest and tax) margin in FY23, but earlier the expectation on this front was 5%.

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The company maintains that the demand conditions are strong, but the mere 2.5% sequential increase in JLR’s order book in Q2 is not encouraging.

The JLR vertical accounted for about 62% of Tata Motors’ consolidated revenue in Q2.

Given this tepid outlook, analysts have, unsurprisingly, trimmed earnings estimates for Tata Motors. “We now expect a (consolidated) net loss in FY23 and cut FY24-25E earnings per share by 3-9% factoring in lower estimates for JLR," Jefferies India analysts said in a report on 9 November. The broking firm had earlier estimated a net profit for FY23.

In FY22, Tata Motors had reported a consolidated net loss.

Against this backdrop, the company’s share price fell by almost 5% on Thursday, with weak Q2 margin performance in the passenger vehicle (PV) and commercial vehicle (CV) segments also adding to the woes.

The silver lining is that 72% of JLR’s order book as on 30 September comprises high-margin products such as Range Rover and Range Rover Sport. A better mix will aid margins in H2. This has also aided JLR’s Ebitda margin in Q2, which rose sequentially by 400 basis points (bps) to 10.3%. JLR also turned positive at the Ebit level.

Meanwhile, Tata Motors’ domestic business margin outlook is improving as the benefit of softening commodity costs is expected to flow through.

However, market share needs closer tracking. Tata Motors’ CV business has lost retail market share this year, according to Vahan data. In H1FY23, the market share was 43.2% compared to 44.7% in FY22. Rising compressed natural gas (CNG) prices have reduced the gap with diesel prices, leading to a shift towards diesel vehicles. Accordingly, Tata Motors’ share of CNG vehicles in the intermediate light CV segment fell from 44% in Q2FY22 to 17% in Q2FY23.

In the PV business, with automakers such as Maruti Suzuki India and Mahindra and Mahindra launching new vehicles, the market share of Tata Motors is a key monitorable and was 14.1% in H1. “Given the heightened competition in the PV segment, Tata Motors may find it difficult to maintain its share in domestic PVs," according to Aniket Mhatre, institutional research analyst, HDFC Securities.

In the electric vehicle (EV) segment, the launch of Tiago EV would boost volumes. Overall, net auto debt levels fell marginally on a sequential basis to 59,900 crore. Tata Motors maintains its target of becoming near net debt free by FY24 but it also noted that this would be a stretch.

A meaningful turnaround in the JLR business will aid investor sentiments for the Tata Motors stock, which is down by 23% from its 52-week high of 536.70 seen in November 2021.

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