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Shares of Tata Motors slipped over 3% in early deals on Wednesday on the BSE after the company flagged chip supply shortage.

The company has warned that a shortage of semiconductors may see Jaguar Land Rover (JLR) report 50% lower wholesale volumes by the end of the September 2021 quarter coupled with a negative EBIT (earnings before interest and taxes) margin. 

In an exchange filing, Tata Motors said, looking ahead the chip shortage is very dynamic and difficult to forecast.

"Based on recent input from suppliers, we now expect chip supply shortages in the September 2021 quarter to be greater than in the first quarter, potentially resulting in wholesale volumes about 50% lower than planned, although we are continuing to work to mitigate this," it added.

The broader underlying structural capacity issues will only be resolved as supplier investment in new capacities comes online over the next 12-18 months. 

The company expects some shortages to continue through to the end of the year.

How does this impact the company? 

Unlike JLR, at the standalone level, Tata Motors’ production has not been impacted so far due to the chip shortages. But the passenger vehicle division of the company generates minuscule revenue compared to JLR which has operations in the US, the UK, Europe, China and other international markets. 

More than 80% of Tata Motors’ revenues come from JLR.

Why is there a semi-conductor chip shortage?

The shortage is largely the result of substantial swings in demand due to the pandemic and the increased use of semiconductors in advanced vehicles.

Restoring market balance will take time because semiconductor manufacturing is not suited to rapid and large shifts in demand. 

Making a semiconductor is one of the most complex manufacturing processes. Lead times of up to 26 weeks are the norm in the industry to produce a finished chip. 

The shortage of these chips has threatened to slash $110 billion in sales from the car industry. It has also forced auto manufacturers to overhaul the way they get the electronic components critical to contemporary vehicle design.

Equitymaster's View on Tata Motors

Co-head of Research at Equitymaster, Rahul Shah, said, "Of late, I have seen a perceptible change in the way car enthusiasts think about home grown brands, especially the ones sporting the Tata badge. They believe that Tata Motors has definitely upped its game when it comes to cars, offering a much better bang for the back in terms of safety, reliability, and style. So much so that they've even persuaded a few in the group to go for a 'Tata' as their next car. Well, it is not just in these chatrooms that Tata Motors is a hot commodity. It has also set the Indian stock market on fire with its stellar run in the last year or so. However, any strong connection between the company's share price jump and its much improved car line up should be taken with a pinch of salt. The company's car division is a small contributor to its overall fortunes. What really moves the needle for the company in terms of its fundamentals is its overseas subsidiary of Jaguar Land Rover and its commercial vehicles division. And therefore, investors should track these divisions closely if they have to take a call on the company as an investment candidate."

You can read Rahul's entire article on this topic here: Is the Tata Motors Stock Running Out of Juice?

How the stock is performing today

Shares of Tata Motors opened lower at Rs316 on both BSE and NSE today and fell almost 3% in intraday trade.

The company’s shares were down for the second consecutive day today. The scrip had hit a lower circuit yesterday as the stock plunged 10% to Rs316 apiece.

However, the stock has zoomed over 190% in the 12 months.

Investors saw the benefit of a macro recovery and a sharp improvement in both Jaguar Land Rover (JLR) as well as the company's India business.

The scrip touched its 52-week high of 360.7 on 15 June 2021. It had touched its 52-week low of 100.6 on 16 July 2020. 

Tata Motors stock performance.
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Tata Motors stock performance.

About Tata Motors

Tata Motors is a leading global automobile manufacturer of cars, utility vehicles, buses, trucks, and defence vehicles.

As India's largest automobile company and part of the $113 billion Tata Sons. Tata Motors has operations in the UK, South Korea, Thailand, South Africa, and Indonesia through a strong global network of 76 subsidiary and associate companies including Jaguar Land Rover in the UK, and Tata Daewoo in South Korea.

Back home, Tata Motors is a market leader in commercial vehicles and among the top passenger vehicles manufacturers with 9 million vehicles on Indian roads.

For more details about the company, you can have a look at Tata Motors' factsheet and Tata Motors' quarterly results.

(This article is syndicated from Equitymaster.com)

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