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Tata Motors and Motherson Sumi shares outperformed the benchmark Nifty auto in the last couple of weeks.
Tata Motors and Motherson Sumi shares outperformed the benchmark Nifty auto in the last couple of weeks.

Tata Motors, Motherson up on Johnson’s victory, but Brexit test begins now

  • The actual impact would be known after the December 2020 deadline when the UK formally exits the European Union
  • Tata Motors’ shares have rallied 62% from the 52-week low on September 4

MUMBAI : The stocks of Tata Motors Ltd and Motherson Sumi Systems Ltd have been most impacted by the noise around the UK’s Brexit deal. Therefore, the rally in both these stocks on the back of Boris Johnson’s landslide victory is not surprising, as it brings certainty to sealing the Brexit deal.

However, it would be prudent for investors not to put the cart before the horse. CNN International said: “After the Brexit deal is passed and ratified in January, the UK moves into an even more expansive and complicated negotiation period, setting out just how closely aligned it will stay to the EU on issues like the environment, competition, workers’ rights and trade."

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

The actual impact will be known after the December 2020 deadline, when the UK formally exits the European Union.

In any case, industry experts and analysts are hopeful that the new government will strive to protect the auto industry, which comprises a significant part of UK’s manufacturing output.

Tata Motors, which owns Jaguar Land Rover Ltd (JLR), is the only Indian auto firm with a manufacturing facility for luxury cars in the UK. Motherson Sumi has several facilities in Europe, which could be affected by Brexit indirectly as it supplies components to global auto original equipment manufacturers.

But near-term impacts could arise from currency fluctuations. The stronger pound versus the rupee may give a leg up to reported earnings per share. However, JLR’s revenue from exports to the US will be negatively impacted with a stronger pound.

Meanwhile, Tata Motors and Motherson Sumi shares outperformed the benchmark Nifty Auto index in the last couple of weeks. Tata Motors’ stock has rallied 62% from its 52-week low on 4 September. News of lower inventory in China and better sales in North America fired the stock. A Motilal Oswal Financial Services Ltd report highlighted that a turnaround was in sight for the company. “JLR has endured a turbulent operating environment over the last two years, led by a troika of adverse macro, product mix and market mix. Some of these challenges, particularly on product/market mix, are likely to ease" it said.

Better auto sales in North American markets will help Motherson, considering that it will improve demand for its components.

The turmoil in the global auto market due to widespread political and macroeconomic uncertainty took a toll on earnings of both firms. Consolidated operating margins fell from double to single digits over several quarters. While JLR is likely to post negative free cash flow till FY21, Motherson’s positives of turnaround in its subsidiaries may be a mask for its debt overhang.

True, a Brexit deal done is to be cheered. But it is unlikely to merit a revision in earnings or valuations of these firms, at least for the near term.

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