After roughly Q1, Tata Motors may be supported by cost easing, better demand

The business faced several constraints during the quarter such as semiconductor shortages, poor mix, and slow ramp-up of the new Range Rover and Range Rover Sport. In addition, the COVID-induced lockdown in China further aggravated the crisis.

Keeping this in mind, analysts at Jefferies India have cut FY23E EBITDA/per share estimate by 9%/24% for Tata Motors mainly due to lower estimates by Jaguar and Land Rover (JLR). Ebitda is earnings before interest, taxes, depreciation and amortization.

But on the bright side, the demand environment remains strong, management said in the earnings call. JLR order book increased from 168,000 at the end of Q1 to 200,000 units at the end of Q4FY22. Nearly 60% of the order book comes from JLR’s most profitable products.

The chip situation is expected to improve going forward and the automaker expects wholesale volumes (excluding joint ventures with China) to rise 40% year-on-year (yoy) and 25% sequentially to around 90,000 units in Q2. Will grow. In Q1, volumes fell 13% annually to 60,800 units.

The company continues to maintain its guidance of achieving an Ebit (earnings before interest and tax) margin of 5% and free cash flow of over £1 billion in FY13.

“JLR has several levers, both cyclical and structural, in the form of cost-cutting initiatives in both variable and fixed costs, mix improvements (growth in Land Rover and China), operating leverage, and cost savings from its modular platform (a But) analysts at Motilal Oswal Financial Services said in a report on July 28. The broking firm believes that convergence of several such factors could lead to recovery in Ebit margin and leave room for positive surprises in profitability. .

Note that in Q1, JLR’s EBITDA margin fell 630 basis points (bps) sequentially to 6.3%, well below estimates. One basis point is 0.01%. This pulled the consolidated EBITDA margin to 4.4% in Q1 compared to 11.1% in Q4FY22.

Tata Motors’ commercial vehicle (CV) and passenger vehicle (PV) business, on the other hand, reported only a marginal sequential decline of 70-80 bps in their respective Q1 EBITDA margins, mainly due to higher input costs, to 5.5% and Rs. was 6.1%.

Nevertheless, with the softening of commodity prices, the outlook is encouraging. Besides, CV is seeing strong domestic demand, which is evident from the sentiment index of the trucker, which according to the company is at a two-year high. However, export markets are currently weak due to depreciation in the local currency.

The PV segment is in a strong position and the company is seeing strong demand for its electric vehicles (EVs). Against this backdrop, analysts at Jefferies have not changed their projections for FY24. “As of FY24, we still see Tata’s EBITDA more than double from FY12, earnings per share higher than the previous peak, and net automotive debt falling 75%. We like that Tata made cyclical improvements and franchise improvements in India, early leadership in India EVs, and a focus on returning to the JLR high-margin Land Rover model,” the Jefferies report added.

Meanwhile, there are also some risks. As JM Financial Institutional Securities explains, “The continued shortage of semiconductors, lower-than-expected adoption of EVs and the inherent risks in developing EV technologies are the major risks.” The broking firm has a positive rating on the stock of Tata Motors. “The favorable mix, said analysts at JM in a report on July 28, “is expected to support margins going forward from sales recovery and cost-saving initiatives, while debt reduction (the target of nearly debt-free by FY24) ) will help strengthen the balance sheet.”

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