BackTata Motors pegs $2.9 billion cash burn at JLR as chip shortages bite
The pandemic has caused a global shortage of semiconductor chips amid rising demand for electronic goods
PremiumOn Tuesday afternoon, Tata Motors Ltd shares were cruising along near their 52-week highs, as if problems such as the chip shortage were minor speed bumps. But investors were in for a rude shock when the company issued a profit warning for not only Q1FY22, but also for Q2FY22.
Tata Motors shares fell 12% from their intra-day highs soon after the stock exchanges published the profit warning. In absolute terms, it amounted to a $1.9 billion hit on the firm’s market capitalization.
It said the cash balance at Jaguar Land Rover stood at £3.7 billion at the end of Q1, down from £4.8 billion in end-March. The massive cash outflow was largely due to the chip supply constraints, which hit production by about 30% in Q1. What’s more, it said the chip shortage is worsening, which will hit production volumes by about 50% and lead to operating cash outflow of about £1 billion in the September quarter. In all, cash outflow in the first half of the year is estimated at $2.9 billion, something that investors evidently did not see coming.
The pandemic has caused a global shortage of semiconductor chips, owing to a surge in demand for electronic goods.
In mid-May, consulting firm AlixPartners had said the semiconductor chip shortage is expected to cost the global automobile industry $110 billion in revenue in 2021.
Indeed, Tata Motors had been talking about the chip shortage for a while, and mentioned in a conference call in mid-May that things had worsened in Q1. But the view on the Street appeared to be that this would only impact demand in the near term, and recoup later.
“The present global supply shortage of semiconductor chips would impact production and sales volumes. However, supply constraints would ease in 2HFY22 as new capacity comes online. As a result, most of the lost production would be recovered once the supply of semiconductor chips improves," analysts at Motilal Oswal had said in a mid-June note to clients.
Tata Motors said the shortages can last much longer. “We expect the situation will start to improve in the second half of our financial year. However, the broader underlying structural capacity issues will only be resolved as supplier investment in new capacities comes online over the next 12-18 months and so we expect some level of shortages will continue through to the end of the year and beyond," it said.
The sharp and sudden decline in the firm’s shares is a good example of the exuberance in the stock markets, with investors brushing aside near-term concerns over earnings, and betting on long-term prospects.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
