The sharp appreciation in Tata Motors’ shares this week has meant that the stock has gained a whopping 264% from its 2020 lows seen on 3 April.
There are some factors contributing to the optimism in the stock. On Monday, overseas subsidiary Jaguar Land Rover’s (JLR) retail sales showed 13% growth in the December quarter versus the September quarter, although 9% lower year-on-year. Analysts reckon that the sequential recovery is encouraging and would ultimately support higher margins. Further, on Tuesday, Tata Motors said its global wholesales, including JLR, have risen 37% sequentially and are 1% higher year-on-year. According to analysts, these numbers are on expected lines and not particularly exciting.
Commenting on the stock performance, an analyst requesting anonymity said, “There is momentum in the stock now and the market is rewarding incremental good news generously." As such, shares of Ashok Leyland Ltd, which is expected to benefit from better-than-anticipated recovery in the medium and heavy commercial vehicle segment, also hit a new 52-week high on Tuesday.
The improvement in Tata Motors’ business outlook has certainly helped. Basudeb Banerjee, auto analyst at Ambit Capital, said, “In the past 2-3 months, truck sales have been improving sequentially. Trucks are relatively a better margin business and improving volumes augur well for the margin outlook helped by cost-cutting initiatives. Eventually, this would support Tata Motors’ transition to becoming free cash flow positive on a standalone basis, from negative currently. Additionally, there is an expectation of positive announcements for the auto sector in the upcoming budget, after waiting for more than a year."
Tata Motors is also on a deleveraging path. ICICI Direct Research said in a December report that Tata Motors “plans to reduce automotive debt to near zero levels in the next few years (about ₹48,000 crore as of FY20)". It goes without saying that disappointments or delays on this front may come as a rude shock for investors.
Going ahead, covid-19-led lockdowns and its adverse impact on demand is a factor to watch out for, said analysts. Moreover, if there is a prolonged slowdown in the domestic market, it could hamper the recovery in sales and that’s a risk as well.
Even as the stock’s gains from the lows are striking, the returns are pretty much in line with broader markets over the past one year.
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