JLR still holds key to Tata Motors’ success

Can Tata Motors stock sustain its good run? (Photo: Mint)
Can Tata Motors stock sustain its good run? (Photo: Mint)

Summary

The sharp run up in Tata Motors’s shares suggests investors are broadly factoring in the near-term outlook. Even as FY24 is likely to be a strong one for JLR, the next fiscal year could see the momentum break as potential demand problems surface even though it is a luxury brand.

The new year will begin with many automobile companies raising the prices of their vehicles. Tata Motors Ltd will also raise prices of its commercial vehicles (CVs) by up to 3% from 1 January. It said the price hike is to offset the residual impact of the past input costs.

It is worth noting here that while input costs have been higher, the pressure has been easing in the past few months. Amid this, price hikes by automakers are likely to support profit margins. Apart from Tata Motors, Maruti Suzuki India Ltd and Mahindra and Mahindra Ltd too, plan to implement price hikes from January citing inflationary forces and fluctuations in commodity prices.

Tata Motors had also taken a price hike in CVs from 1 October in anticipation of commodity headwinds, especially from steel price. As such, the company’s CV volume growth is expected to moderate in FY24 vis-à-vis FY23. In the quarter-ending September (Q2FY24), Tata Motors’ total domestic CV volumes saw 6% year-on-year growth. Further, according to the Q2 presentation, market share based on Vahan registration data shows the company’s CV domestic market share rose sequentially to 39.7% in Q2 from 39.1% in Q1. This expansion came on the back of new product launches in tandem with improved availability of vehicles after the BS6 phase II transition.

Moreover, there is thrust on profitability. In Q2, CV business saw year-on-year Ebitda margin expansion of 540 basis points to 10.4% on the back of a richer product mix and better realizations. Ebitda is earnings before interest, tax, depreciation, and amortization. One basis point is 0.01%.

Going ahead, Tata Motors intends to continue to clock a double-digit Ebitda margin in the CV segment. A differentiated focus on small commercial vehicles portfolio should aid in driving profitable growth. The management also aims to boost volumes and expand market share.

So far in the December quarter, the CV volume performance has been subdued. Tata Motors’ domestic CV volumes rose by 4% year-on-year in October and fell by 3% in November. To be fair, Ashok Leyland’s CV volumes also fell in November. The weakness in November can likely be owing to weak demand in states following assembly elections. As such, demand conditions need closer tracking ahead of upcoming general elections.

Meanwhile, for investors, the spotlight is on Tata Motors’ British subsidiary, Jaguar Land Rover Automotive Plc (JLR), which contributed about 68% and 75% of consolidated revenues and pre-tax profit in Q2FY24. Remember, shares of Tata Motors have raced ahead in 2023, gaining as much as 84% so far in 2023. Here, a good part of the optimism stems from JLR’s performance. Encouraged by H1FY24, the management has increased JLR’s Ebit (earnings before interest and tax) margin guidance for FY24 to 8% from 6% earlier.

Reducing debt too has aided sentiments for the stock, along with the successful listing of subsidiary Tata Technologies. In Q2, Tata Motors’ net auto debt fell 7% sequentially to 38,700 crore, which was “lowest in 18 quarters," as per Jefferies India’s analysts.

The sharp run up in Tata Motors’s shares suggests investors are broadly factoring in the near-term outlook. Even as FY24 is likely to be a strong one for JLR, the next fiscal year could see the momentum break as potential demand problems surface even though it is a luxury brand. In general, lower than expected demand poses a risk to the domestic business as well. However, a trigger for the stock could come from positive surprises on profit margins.

 

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