UBS thinks investors should sell Tata Motors stock; here’s why

While Tata Motors' management remains optimistic about the demand situation for its luxury vehicles, with a pipeline of electrified models on the horizon, Global brokerage firm UBS believes this may be a good time for investors to sell the stock.

UBS has resumed coverage on Tata Motors with a 'sell' call with a target price of ₹450.

"We resume coverage with an anti-consensus sell. Our deep dive into the global premium EV (electric vehicle) landscape to evaluate JLR's (over two-thirds of FY23 sales/EBITDA) positioning suggests the market is underestimating its vulnerability amid the rapid electrification of premium cars," said UBS.

UBS believes investors are overlooking the significant shift in the global premium car market caused by electrification.

"We note how electrification in China is disrupting the profit pool of global premium brands, and we expect the same to play out in other regions. We foresee this eroding JLR's margins to about 4 per cent in FY25/FY26 versus guidance for double-digit EBIT margins in the medium term," said UNS.

"The strategy to put Jaguar centre stage with three new EV models warrants some caution, in our view, given the lacklustre attempts to revive Jaguar in the past," said the global brokerage firm.

The brokerage firm underscored that at the current price, JLR's implied PE (price-to-earnings) ratio is at a 70 per cent premium to BMW AG/Mercedes despite JLR lagging in financial/technology parameters.

Moreover, Tata Motors' domestic market share in cars is peaking with increased competition. UBS expects Tata's PV (passenger vehicle) market share to peak as its launch pipeline is much weaker than market leader Maruti's and EV competition is intensifying.

"Its other competitors also have strong EV launch pipelines, prompting us to revisit Tata's EV valuation. In CVs (commercial vehicles), Tata continues to underperform on volumes and margins, with mounting worries of a CV slowdown," UBS said.

"We believe the roughly 23 per cent outperformance year-to-date versus the S&P BSE Auto index following JLR's robust earnings, driven by an unsustainable mix and near-zero discounts, is short-lived and presents a good selling opportunity for investors," UBS added.

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Shares of Tata Motors hit their 52-week lows of ₹375.50 on December 26, 2022. As of May 24 close, the stock is up nearly 39 per cent from that level.

The company reported its March quarter earnings post-market hours on Friday, May 12 and in the next trading session on May 15, the stock hit its 52-week high of ₹537.15. Tata Motors 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. Sequentially, the Q4FY23 PAT saw a growth of nearly 83 per cent. The automaker's revenue rose 35 per cent year-on-year (YoY).

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

Among the domestic brokerage firms, Motilal Oswal Financial Services maintained a buy call on the stock after the March quarter numbers, pegging the target price of ₹590.

Brokerage firm Sharekhan by BNP Paribas also maintained a buy call on the stock and raised the target price to ₹600.

Prabhudas Lilladher also maintained a buy call on the stock with a target price of ₹605. ICICI direct also suggested buying the stock with a target price of ₹650.

Tata Motors shares traded 1.78 per cent lower at ₹510.95 on BSE around 1:45 pm.

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