Automaker has myriad hurdles to cross before a rise in earnings per share backs the meteoric rise in the stock price
Tata Motors said it has resumed three-fourth of its budgeted JLR production in China on improved demand
Tata Motors Ltd’s shares surged by 19% on Thursday, making it the top gainer among Nifty and Nifty Auto stocks, with news that its subsidiary, Jaguar Land Rover Ltd (JLR), has ramped up production in China, its key market, rekindling hope among investors.
However, Tata Motors’ shares are still down 53% from their highs seen earlier this year. The stock had fallen as much as 67% between mid-January and early April and the recovery since has helped it recoup only about 20% of the losses.
A sustained increase in sales may take some time, given the covid-19 pandemic and its impact on the demand for vehicles. However, resumption of production across countries suggests that the worst is behind the company.
The company said it has resumed three-fourths of its budgeted production in China, on the back of improved consumer demand. “In China, we are beginning to see a recovery in vehicle sales and customers are returning to our showrooms," JLR said in a press release dated 23rd April.
Sales in China, which account for about 20% of JLR’s global sales (Q4 FY20 retail sales data), tumbled 85% year-on-year in February, when the region was reeling under the coronavirus outbreak.
The glimmer of hope notwithstanding, it is better for investors to err on the side of caution. “Despite a stronger-than-expected rebound in economic activity in March, China’s real gross domestic product growth slumped to -6.8% y-o-y in Q1 2020 from 6.0% in Q4 2019…. Despite its initial success in containing covid-19, China still faces two dire challenges: collapsing external demand because of the pandemic and the rising threat of a second wave of covid-19 infections," said a note by Nomura Research on 29 April.
There may not be a near-term recovery in the UK and US markets, which account for 60-65% of JLR’s sales, even if things return to normal in China faster than expected, according to analysts. The impact of global supply-chain disruption, along with heightened competition as firms try to grab markets, is likely to take a toll on profitability.
Also, it is not long since Fitch Ratings Inc. downgraded Tata Motors’ long-term issuer default rating from “BB-" to “B", on the back of a 50% estimated drop in operating profit in FY21. The negative outlook factors in pain both at JLR and the stand-alone business at Tata Motors, where the commercial vehicle division faces a grim outlook and the passenger vehicle division does not offer much to ride on.
As such, Tata Motors has myriad hurdles to cross before a rise in earnings per share backs the meteoric rise in the stock price.
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