Road ahead for Tata Motors depends on the pace of volume recovery

While September quarter results for the 2022-23 financial year (Q2FY23) of Tata Motors missed the Street estimates, making analysts cautious on the pace of recovery going ahead as supply conditions ease and commodity prices start coming off.

Some brokerages have cut their consolidated operating profit and net profit earnings estimates for FY23 and FY24 by up to 10 per cent to reflect slow volume recovery as well as unfavourable currency impact.

Jinesh Gandhi and Aniket Desai of Motilal Oswal Research say that the company’s Q2FY23 performance was an all-round miss. “Jaguar Land Rover (JLR) continues to struggle with semiconductor shortages, which has been impacting its performance for the last five-to-six quarters. Its India commercial vehicle and passenger vehicle (CV and PV) businesses were hit by residual commodity cost inflation, which should reverse from Q3FY23.”

The analysts believe that ramp-up in JLR’s production is key as demand is strong -- especially in its most profitable products of RR, RR Sport, and Defender -- which account for 72 per cent of the order book. Given the slower production ramp up at JLR, the brokerage has cut its consolidated earnings estimate for FY23 to a loss from profit earlier and its FY24 earnings by 6 per cent.

Kotak Institutional Equities has cut its consolidated operating profit estimates for FY23 by 19 per cent due to lower volume assumptions for JLR and reduced operating profit margin estimates for the domestic business. It has also cut its FY24 and FY25 operating profit estimates by 10-11 per cent on volume cuts for JLR/domestic business and a 4 per cent negative impact due to currency translation, given the depreciation of the pound against the rupee.

“We expect gradual recovery in JLR volumes owing to recessionary concerns. Also, market share loss in the CV segment and increased competitive intensity in PV segment will weigh on margin recovery,” say Rishi Vora and Eswar Bavineni of the brokerage while downgrading the stock.

Tata Motors reported a 30 per cent year-on-year (YoY) growth in revenues while operating profit saw a 35 per cent jump. While margins rose by 30 basis points (bps) YoY, they were up by a sharp 360 bps on a sequential basis. Though raw material costs were an overhang and engineering/marketing spends were elevated, price hikes and better model mix helped deliver strong sequential margins.

The company has guided for positive segment level performance with near breakeven free cash flows at JLR on the back of recovery in production, refocus programme and improving cost efficiency. Retail demand is robust due to record orders and low inventory levels. Favourable mix, sales recovery, and softening raw material costs are expected to support margins going ahead, believe analysts at JM Financial Research. The brokerage, which has a ‘buy’ rating, says that Tata Motors’ electric vehicle (EV) portfolio is leading the domestic EV space and by securing strategic investors further, it is well poised to build on its initial success.