Fast lane for Tata Motors but can it stay the course?

Investors are upbeat about Tata Motors’ British subsidiary, Jaguar Land Rover, but the Red Sea crisis could hurt supplies to China and other markets. (Bloomberg)
Investors are upbeat about Tata Motors’ British subsidiary, Jaguar Land Rover, but the Red Sea crisis could hurt supplies to China and other markets. (Bloomberg)

Summary

While investors are upbeat about the automaker’s potential, FY25 may force it to slow down as headwinds emerge

It appears there is no stopping the Tata Motors Ltd stock. Post its December-quarter (Q3FY24) results, the automaker’s shares gained nearly 6% on Monday, becoming the top Nifty 50 gainer.

With this, the shares have appreciated by 19% so far in 2024, after surging 101% in 2023. Investors are gung-ho primarily owing to the improving performance of Tata Motors’ British subsidiary, Jaguar Land Rover Automotive Plc.

In Q3, JLR’s margin on earnings before interest and tax, or Ebit, increased by 510 basis points year-on-year to 8.8%, aided by moderating chip and material costs coupled with favourable product and geography mix.

 

 

The portfolio mix was tilted towards China and that had a positive bearing on the gross margin. As such, JLR is on the right track to achieve its FY24 Ebit margin target of over 8%, which would be a big jump from 2.4% in FY23.

FY24 is likely to end up as a noteworthy year for JLR. But the next fiscal year may see a slowdown in the pace as headwinds emerge.

For one, the Red Sea crisis could impact supplies to China and other overseas markets. China accounted for about 14% of JLR’s wholesale volume in the nine months ended 31 December, while the share of the overseas region was 20%.

Besides, freight costs may also increase.

Two, a new wage agreement could lead to an increase in employee costs. And three, JLR aims to invest more in customer acquisition with a rise in variable marketing expenses (VME) from the current level of 2.5% of revenue.

Kotak Institutional Equities expects that with a normalised orderbook the company will incur higher VME discounts and fixed marketing expenses. But the broking firm also expects that the increase in expenses will be offset by cost-cutting measures, process improvements, and operating leverage benefits.

Having said that, one needs to monitor the volume trajectory. In the nine months ended December, JLR’s wholesale volume was up by over 28%.

“FY25 JLR volume growth should taper to a low single digit," Nuvama Research said in a report dated 3 February, adding that S&P Global Mobility has forecast underlying four-wheeler industry growth in 2024 at 2% for the US, 3% for Europe, and 5% for China.

Coming to the domestic businesses, the commercial vehicle (CV) segment is likely to see a volatility in volume in the backdrop of the upcoming national election. In Q4, Tata Motors expects CV industry volume to decline in single digit year-on-year, and remain softin the first quarter of FY25.

The automaker’s CV market share in Q3 stood at 38.7%, down 100 basis points sequentially.

The passenger vehicle segment is also seeing some demand concerns. Tata Motors expects the industry to clock a growth rate of less than 5% in FY25.

Moreover, the electric vehicle portfolio would weigh on profitability as it is margin-dilutive. The company plans to launch three EVs in 2024. But it is encouraging that the Ebitda margin before accounting for research and development expenses in the electric vehicle business was near breakeven in Q3.

All things considered, given Tata Motors’ strong Q3 showing, analysts have raised their earnings estimates on the company. Jefferies India has raised its FY24-26 earnings per share estimate for Tata Motors by 7-11%, factoring lower India CV volumes but higher estimate for JLR.

Meanwhile, debt levels are falling and that is a positive. In Q3, Tata Motors’ net auto debt stood at 29,200 crore, down by 24.5% sequentially. The automaker expects to be in a net cash position in the JLR business in FY25.

As things stand, investors are factoring in the optimism adequately but continued deleveraging and improving profitability remains crucial.

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