Kotak Institutional Equities downgrades Tata Motors; here’s what the brokerage says

The recent sharp gains in shares of Tata Motors may lure you into buying the stock but brokerage firm Kotak Institutional Equities believes it is time to trim the exposure to the upside potential of the stock looks capped.

The brokerage firm has downgraded the stock of Tata Motors to a 'reduce' from an 'add', after a recent rally with an unchanged fair value (target price) of ₹530. While the brokerage firm maintained its FY2024-25E earnings per share (EPS) estimates, it expects the domestic passenger vehicle (PV) and commercial vehicle (CV) segments’ volumes to grow by single digits on a year-on-year (YoY) basis in FY24E.

Kotak said commodity tailwinds and a superior product mix will support margin recovery, but elevated inventory levels in the PV segment may drive the discount higher.

"We expect the operating performance to continue improving, led by (1) a gradual recovery in JLR volumes and (2) steady demand conditions in domestic markets, which should drive deleveraging; we believe it is priced-in at CMP. Increased competitive intensity from Chinese players in the EV segment in global markets remains a key risk for the JLR business over the coming years," said Kotak.

The brokerage firm highlighted that at its analyst meet, Tata Motors outlined its strategic objectives to (1) sustainably gain market share in the PV and CV segments, (2) improve profitability through cost reduction efforts, reducing platforms and lower development costs and (3) become net cash at a consolidated level by FY2025 through internal free cash generation, divestments and working capital management.

The company’s differentiated strategy has started to yield results and it is focused on driving customer-centric innovation, digitalization and integrating sustainability to lead the shift toward a greener future, Kotak highlighted.

As per the brokerage firm, Tata Motors aims to achieve double-digit EBITDA in the TMPV business (ICE business) in the near term, sustainably gain market share across the ICE and EV segments and maintain positive FCF.

"The company is focused on five strategic pillars over the coming years—(1) comprehensive powertrain portfolio, (2) growing the EV market in India, (3) localization of EVs, (4) leveraging advanced technologies and (5) structured margin improvement program," Kotak said.

Tata Motors' share price rose over a per cent to hit its fresh 52-week high of ₹576.50 in morning trade on Thursday (June 8) on BSE.

The stock has gained about 30 per cent in the last three months against a 14 per cent gain in the BSE Auto index and a 4 per cent gain in the equity benchmark Sensex.

The automaker surpassed estimates in consolidated net profit to ₹5,407.79 crore in the fourth quarter of FY23, against a net loss of ₹1,032.84 crore in the same quarter a year ago. On a consolidated basis, revenue from operations stood at ₹1,05,932.35 crore in Q4FY23, as compared to ₹78,439.06 crore in Q4 of the previous fiscal. In December 2022 quarter, the revenue was at ₹88,488.59 crore.

Read more: Tata Motors Q4 results: Auto giant beats estimates, consolidated PAT rises to ₹5,408 cr, revenue up 35%. Details here

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Disclaimer: The views and recommendations given in this article are those of the brokerage firm. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.