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Tata Motors Ltd’s shares jumped nearly 9% on the NSE on Friday, a day when the benchmark Nifty50 index fell marginally. There was some excitement about the March quarter (Q4FY22) margin performance of its UK-based subsidiary, Jaguar Land Rover Automation PLC. The Jaguar and Land Rover (JLR) segment earnings before interest, tax, depreciation and amortization (Ebitda) margin stood at 12.6%, an increase from the 12% in Q3.

“Going into the results, investors feared JLR’s margin could come under pressure on lower sales of the high-margin Range Rover as the model goes for a changeover. Accordingly, the stock was weak in the recent few days. However, despite an inferior mix, JLR’s margin expanded sequentially, helped by exceptionally low discounts and higher scale," said Kumar Rakesh, a senior automobile and technology analyst at BNP Paribas Securities India. Tata Motors’ Q4 results were out on Thursday after market hours. The company’s shares have now pretty much recovered the losses seen last week prior to Friday’s gains. While the Russia-Ukraine war had a limited impact on JLR production, the business remains affected by the global semiconductor shortage. JLR’s wholesale volumes (excluding joint venture) fell by 37.6% year-on-year (y-o-y) in Q4.

Against the odds
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Against the odds

Further, the JLR business is likely to be adversely impacted by the lockdown in China and changeover in Range Rover Sport in Q1 FY23. Though the chip shortage would continue in FY23, it is foreseen to gradually improve. The management expects to offset higher commodity costs in FY23 in JLR through the Refocus program initiatives. It aims to achieve an Ebit (earnings before interest and tax) margin of 5% and free cash flow (FCF) of more than £1 billion in FY23.

JLR’s order book as at the end of Q4 stood at roughly 168,000 units, up by 13,000 units sequentially. Owing to this, and low channel inventory in the system, analysts at ICICI Securities expect the mix to normalize, resulting in mean reversion of realization and gross margin as production improves.

Even so, some analysts have cut consolidated earnings estimates. Motilal Oswal Financial Services has cut its FY23-FY24 consolidated earnings per share estimate by 12% each. This is on account of the impact on JLR’s volume due to the lockdown in China, slower improvement in chip supplies, cost inflation and translation impact of the rupee’s appreciation against the pound on JLR consolidation.

Going ahead, the commercial vehicle (CV) segment, which saw 29% y-o-y revenue growth in Q4, would benefit from the increased infrastructure spend by the government and robust e-commerce activity. The rise in fuel prices has not had an impact on the pipeline of customers, said the management.

In the passenger vehicle (PV) segment, supply constraints hurt production of PVs by 10% in April even as demand conditions are strong. However, the management sees a possibility of PV volumes in FY23 surpassing the peak seen in FY19.

Margins continue to face risk from high raw material costs. Even so, in FY23, Tata Motors expects PV business margin to improve and CV Ebitda margin to be near double digits. Overall, the company aims to improve Ebit and FCF, to make its automotive business near net debt-free by FY24. Separately, Tata Motors’ electric vehicles and compressed natural gas vehicles are seeing increased traction. Tata Motors’ shares at 404.30 apiece have declined by 16% so far in 2022, although they are up 24% in the past one year. Motilal Oswal’s March 2024 sum-of-the-parts based target price for the stock is 485 per share. Sustained chip issues and slower-than-expected recovery are key risks.

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