Shares of Tata Motors Ltd jumped nearly 9% on the NSE on Friday, a day when the benchmark Nifty 50 index declined marginally. There was some excitement about the March quarter (Q4FY22) margin performance of its UK-based subsidiary Jaguar Land Rover Automation Plc. The Jaguar and Land Rover (JLR) segment’s earnings before interest, taxes, depreciation and amortization (Ebitda) margin was 12.6%, up from 12% in the third quarter.
“Going into the results, investors feared that JLR’s margins could come under pressure on lower sales of the higher-margin Range Rover as the model goes for a turnaround. Accordingly, the stock was weak in the recent few days. However, despite a poor mix, JLR’s margins expanded sequentially, helped by exceptionally low discounts and high scale,” said Kumar Rakesh, a senior automobile and technology analyst at BNP Paribas Securities India. Tata Motors. Q4 results were out after market hours on Thursday. Shares of the company have recovered substantially from losses seen last week before Friday’s gains. While the Russia-Ukraine war had a limited impact on JLR production, trading JLR’s wholesale volumes (excluding joint ventures) fell 37.6% year-on-year (YoY) in Q4.
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Also, the lockdown in China and changes to Range Rover Sport in Q1 FY23 are likely to impact the JLR business adversely. Although the chip shortage will continue into FY13, it is expected to improve gradually. Management expects higher commodity costs to be offset through the initiative of the refocus program at JLR in FY13. It aims to achieve a 5% Ebit (earnings before interest and tax) margin and free cash flow (FCF) of over £1 billion in FY13.
JLR’s order book at the end of Q4 stood at around 168,000 units, a growth of 13,000 units sequentially. Due to this, and due to low channel inventory in the system, analysts at ICICI Securities expect the mix to normalize, resulting in an average reversal of realizations and gross margins as production improves.
Still, some analysts have cut consolidated earnings estimates. Motilal Oswal Financial Services has cut its FY23-FY24 consolidated earnings per share estimate by 12% each. This is due to the impact on JLR volumes due to the lockdown in China, slow recovery in chip supply, cost inflation and translation effect of appreciation of rupee against pound on JLR consolidation.
Going forward, the commercial vehicle (CV) segment, which witnessed 29% year-on-year revenue growth in Q4, will benefit from increased infrastructure spending by the government and strong e-commerce activity. The management said that the increase in fuel prices has not had any impact on the customers’ pipeline.
In the passenger vehicle (PV) segment, supply constraints impacted PV production by 10% in April, even though demand conditions remain strong. However, the management sees a possibility of PV volumes in FY19 surpassing the peak seen in FY19.
Margins are exposed to risk due to higher raw material cost. Nevertheless, in FY23, Tata Motors expects PV business margin to improve and CV Ebitda margin to be close to double digits. Overall, the company aims to improve Ebit and FCF to make its automotive business net debt-free by FY24. Separately, Tata Motors’ electric vehicles and compressed natural gas vehicles are witnessing growth. Shares of Tata Motors 404.30 each are down 16% so far in 2022, though they’re up 24% over the past year. Motilal Oswal’s March 2024 Sum-of-Parts based target price for the stock is 485 per share. Continuing chip issues and slower-than-expected recovery are the major risks.