Tata Motors Faces Challenges: Motilal Oswal Gives ‘Neutral’ Rating with ₹990 Target

Overview: Motilal Oswal has maintained a “Neutral” rating on Tata Motors with a target price of ₹990, as the company faces supply chain issues affecting its Jaguar Land Rover (JLR) business.

Key Highlights:

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• JLR’s wholesale sales (excluding the China joint venture) dropped by 10% year-on-year (YoY) in Q2 FY25, with production limited to 86,000 units due to disruptions in the supply of high-grade aluminum. Additionally, 6,500 vehicles were temporarily held for quality control in the UK and Europe, but these are expected to be sold in the second half of the fiscal year.
• JLR’s most profitable models, including the Range Rover, Range Rover Sport, and Defender, made up 67% of total wholesale sales.
• Despite these challenges, JLR expects both production and sales volumes to increase in the second half of FY25 as the aluminum supply issues get resolved.
• Retail sales, including the China joint venture, were down 3% YoY, with a drop in Europe (-22%), China (-17%), and other markets. However, North America (+9%) and the UK (+29%) saw gains.
• Tata Motors’ revenue, EBITDA, and profit for Q2 FY25 are expected to be slightly lower than previous estimates due to these challenges.
• Motilal Oswal sees JLR’s profit margins staying under pressure over the next few years due to higher costs, the shift towards electric vehicles (EVs), and a less favorable product mix. Demand is also slowing in Tata Motors’ Indian business, both for commercial and passenger vehicles.
• While Tata Motors had a strong performance in FY24, these upcoming hurdles could impact its growth. The stock is currently trading at 16x/13x estimated earnings for FY25/FY26, and Motilal Oswal has reiterated its “Neutral” stance with a target price of ₹990 based on a sum-of-the-parts (SOTP) valuation.

Conclusion: Tata Motors, particularly its JLR division, is facing headwinds due to supply chain issues and rising costs. While there are expectations of improvement in the second half of FY25, challenges in both its global and Indian operations have led Motilal Oswal to maintain a “Neutral” rating with a price target of ₹990.