Tata Motors shares gain 8.5% on company's goal to bring debt to near zero

Analysts say company's investors are confident firm will be able to achieve significant deleveraging on the back of better performance in both, domestic business and JLR

A day after N Chandrasekaran, chairman, Tata Motors made public the plans of reducing debt to near-zero levels over the next three years, company’s investors lapped up the stock. Rising to 10-week high, shares of Tata Motors closed at Rs 137.85 a piece, up 8.5 per cent on Wednesday over the previous day. 

The running up of the stock indicates that company’s investors are confident that the Tata group flagship will be able to achieve the target of deleveraging the balance sheet in a significant way on the basis of an improvement in operational performance in both, the domestic business and Jaguar Land Rover Automotive, its UK subsidiary, said analysts. 

It is largely based on the better-than-expected recovery in the demand scenario across various geographies for where JLR has presence in. JLR is seeing signs of recovery across the regions with positive retail sales performance in North America and China in June. It has raised its cost-saving target for FY21 by GBP 1bn to GBP 2.5bn. It expects a sequential improvement in profits in 2QFY21.

“Currently the TML group has a net automotive debt of Rs48000 crore and currently we are deleveraging this business substantially. The target is to bring it to near zero debt levels in the next three years. Towards this the company has already taken steps. This includes making the company free cash flow positive by FY22,” Chandra told the shareholders at company’s 75th Annual General Meeting on Tuesday.  The TML group, he added will also look to unlock investment in various non-core businesses.

If things keep improving, the margins will firm up going ahead substantially, says Aditya Makharia, vice president at HDFC Securities. “They have shown in the past that the business can return 15-18 per cent margins. There are a lot of leverage benefits available if the cycle picks up.  If the economic recovery continues and vaccine is found, the balance-sheet will look significantly better,” said Makharia. 

Others are also optimistic that the recovery will gain momentum. “We remain positive on JLR’s upcoming product pipeline, which will improve the mix in favour of the more profitable Land Rover   brand. We expect demand across some of its key markets to normalize as we believe the worst is behind,” wrote Chirag Shah and Jay Mehta, analysts at Edelweiss Securities. 

A tight control on costs should also bolster profitability, they said adding that the capex cycle has peaked and reducing capex spend should also help JLR’s free cash flow. “For the India business, after two years of slowdown, we expect volumes to recover gradually. This, coupled with a sharp cost focus, should help revive profitability,” wrote Shah and Mehta.

However, not everyone is as optimistic. Mitul Shah, vice president, research at Reliance Securities says while reducing the debt over the next three years is possible, bringing it to near zero is very challenging. The present business environment is very tough especially for the luxury car segment given the uncertain economic situation globally.  It also remains to be seen how soon the world recovers from the pandemic related challenges completely. “The competitive business environment facing the company may also restrict its debt repayment ability,” said Shah.

JLR is expected to be loss making even in the current September quarter as the company will be focusing on reducing dealer inventory. It will be cash-positive in each of the following quarters and sustainably cash-positive from FY22.