Near term headwinds for JLR due to chip shortage to weigh on Tata Motors

Brokerages cut FY22 estimates sharply, expect recovery in second half of FY22

Tata Motors faced twin issues of chip shortage in subsidiary Jaguar Land Rover or JLR and lockdown in the India business which dented its operational performance in the June (Q1FY22) quarter. The company reported a 650 basis points sequential decline in earnings before interest, depreciation, taxes and amortisation to 7.9 per cent. Though the decline was sharp, it was better than what the street was working with due to favourable product mix.

What would weigh on the stock, which was down a per cent in trading on Tuesday, is the near term outlook for JLR. The company indicated a 50 per cent cut in production for the September quarter (Q2FY22) due to the shortage of semiconductors. The management has guided for a loss at the operating profit level (EBIT) and negative free cash flows or FCF (2 billion pounds) in the first half of FY22 due to production issues.

The negatives according to analysts led by Raghunandhan N L of Emkay Research was JLR’s Q2 guidance at wholesales of 65,000 units with negative EBIT margin and FCFs. The company had to pay an emission penalty of 66 million pounds as its electric vehicle (EV) proportion in the product mix was at 8.5 per cent lower than the required level of 12 per cent. Despite a healthy order book, the chip shortage is preventing JLR from achieving this target, they add. The company expects the negative EBIT margin to reverse in the second half of FY22 and reiterated its medium term (FY24) target of 7 per cent EBIT margin. Q1FY22 EBIT margin for JLR stood at -0.7 per cent while it was -1.4 per cent at the consolidated level.

In addition to continued pressure on profitability, brokerages highlight competitive weaknesses of JLR. Say Hitesh Goel and Rishi Vora of Kotak Institutional Equities,  “We believe competition is quite aggressive in the electric vehicle space and JLR is launching its pure electric vehicle quite late compared to competition which could lead to market share loss. Further, JLR’s investment in the EV space space is quite weak as compared to other global players.” The brokerage has a sell rating as JLR is being given a higher multiple of 8.9 times FY23 earnings estimates as compared to peers such as BMW which is trading at 7.2 times. Nomura Research, which has a neutral rating on the company, also highlights lack of EVs as a key long-term concern for JLR.  

While the India business revenues declined 41 per cent sequentially due to the lockdown, it was better than analyst estimates driven by higher realisations. Though margins for the commercial vehicle business were flat at 0.1 per cent as compared to 9.1 per cent in the March quarter, the passenger vehicle segment reported a profitability of 4.1 per cent, its fourth consecutive quarter of positive operating profit, according to Motilal Oswal Financial Research. The brokerage which has a buy rating on the company cut its FY22 profit estimates sharply (77 per cent) even as it has maintained its FY23 estimates.  

Despite the near term challenges, most brokerages are positive on the long term prospects of the company. JM Financial which has a buy rating believes that a favourable mix, sales recovery and cost saving initiatives are expected to support margins going ahead while focus on debt reduction (target of debt free by FY24) will aid balance sheet strength.