Home >Markets >Mark To Market >Tata Motors drives past Brexit hurdle, but sales revival is key

After what seems like ages, a late-2020 Brexit deal between the UK and the European Union has enthused investors of Tata Motors Ltd. After the deal, Jaguar Land Rover (JLR) can continue to export and import between the UK and the EU without any restrictions and additional overheads. This drove the Tata Motors stock up 5.6% on Monday.

No doubt, the deal removes a longstanding overhang on the stock because of the delay in Brexit negotiations. Note that JLR accounts for over 80% of Tata Motors’ revenue, and hence the deal was crucial.

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The deal will also help consolidate the recovery seen in JLR sales in the second quarter. JLR retail sales were up 53% sequentially in Q2, which is a substantial recovery post the lockdown in the UK.

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Of course, things are not out of the woods in the UK yet, given that the second wave of virus infections is being seen as more severe. Hence, the recovery may not be smooth and could be more gradual.

Nevertheless, analysts expect a global recovery in the auto sector after the slowdown in the previous two years. “As global demand catches its breath, we think demand in 2021 will return to growth, forecasting a 10.1% year-on-year growth with solid recoveries in the US and China, while maintaining a cautious stance on Europe," Credit Suisse said in a 15 December report.

This could be further helped by the fact that JLR has been continuing its cost reduction efforts. In Q2, JLR’s profit before tax turned positive despite vehicle sales being lower than the year-ago period. JLR’s Ebitda margins stood at 11.1%, which is encouraging. Ebitda is earnings before interest, tax, depreciation and amortization.

In addition, major capital spends for JLR are now behind with an improvement expected in the product mix, said analysts. This should lift free cash flows of JLR. Hence, if the trend persists, the efforts are being seen to considerably improve the operating profile in the coming year.

The stock has been on a roll post the lockdown. After the covid-19 hammering, the stock is now back near its pre-covid levels. However, post the exuberance around the Brexit deal, investors are likely to focus on JLR sales and a recovery in domestic market.

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