Sharekhan Recommends ‘Buy’ on Tata Motors with a Target Price of ₹1319

Sharekhan is optimistic about Tata Motors and has given a “Buy” rating for the stock, setting a target price of ₹1319 in their report dated October 11, 2024.

JLR Production Issues Were Expected

Tata Motors’ Jaguar Land Rover (JLR) faced lower production in Q2 FY2025, which was already anticipated by management. JLR’s wholesale volumes, excluding the China joint venture, dropped by 10% year-on-year and 11% quarter-on-quarter to 87,303 units. Production was capped at 86,000 units, down 7% from last year, mainly due to supply issues with high-grade aluminum. Additionally, quality checks led to a temporary hold on 6,500 vehicles, primarily in the UK and Europe. These vehicles are expected to be sold later this year. Notably, the most profitable models like the Range Rover, Range Rover Sport, and Defender made up 67% of JLR’s total sales. JLR expects a strong rebound in production and sales in the second half of FY2025.

BMW Faces Its Own Challenges

BMW has reduced its expectations for deliveries and profitability for 2024 due to supply issues and weak demand in China. They announced problems with a vendor affecting over 1.5 million vehicles, leading to delivery halts and additional warranty costs. As a result, BMW has revised its delivery outlook to slightly lower than previously expected and adjusted its EBIT margin forecast down from 8-10% to 6-7%.

Expectations for H2 FY2025

JLR had previously indicated weaker global demand and production limits in Q2 and Q3 FY2025 due to supply disruptions. Despite these challenges, JLR has projected an EBIT margin of over 8.5% for FY2025. They anticipate revenues of £30 billion and plan to become net cash positive this fiscal year. In H1 FY2025, Tata Motors’ Passenger Vehicle (PV) and Commercial Vehicle (CV) businesses saw volume declines of 3.7% and 7.6%, respectively. Sharekhan predicts Tata Motors will experience a 3.9% revenue decline, a 1.6% drop in EBITDA, and a small increase in EBITDA margin to 13.4% year-on-year in Q2 FY2025. However, they maintain their full-year estimates, expecting improvements in H2 FY2025.

Recommendation

Sharekhan maintains a “Buy” rating for Tata Motors with a target price of ₹1319. The production issues at JLR are seen as temporary, and the anticipated recovery in H2 FY2025 should align with their projections for the year. Tata Motors is focused on maintaining its profitability in both domestic PV and CV markets and expects commodity prices to remain stable. The development of an EV battery cell plant will help reduce reliance on third-party suppliers. While hydrogen fuel cell technology is still developing, Tata Motors is working on its growth potential in that area as well.

Key Risks

Tata Motors’ performance relies on cyclical industries like CVs and PVs. Economic downturns in any region where they operate can impact business and profits. Additionally, ongoing global chip shortages could further affect operations.