Tata Motors hits nine-month high; stock advances 33% in one month

Analysts believe the company will benefit from an improving demand outlook, cost-cutting initiatives, and better FCF generation.

Shares of Tata Motors were trading higher for the third straight day on Wednesday. The stock hit a nine-month high at Rs 170, up 8 per cent on the BSE on Wednesday on the expectation of improvement in demand outlook. The stock of the Tata Group commercial vehicles manufacturer was trading at its highest level since February 17, 2020. In the past month, it has outperformed the market by surging 33 per cent, as compared to a 10 per cent rise in the S&P BSE Sensex.

Tata Motors reported a healthy operational performance in July-September (Q2FY21). Consolidated margins were at 12.5 per cent amid return to the double-digit margin in Jaguar Land Rover (JLR) at 11.1 per cent and EBITDA (earnings before interest, taxes, depreciation, and amortisation) breakeven in India passenger vehicles (PV) business.

Continued delivery on cost and cash savings programmes in JLR and Indian operations was key to the healthy margin performance. Amid working capital unwind, the company posted free cash flow (FCF) of Rs 6,700 crore against negative Rs 2,500 crore in Q2FY20. Tata Motors reiterated commitment towards turning sustainably FCF positive as a means to reducing automotive debt, going forward, ICICI Securities said in result update.

According to media reports, the UK government plans to ban the sale of petrol and diesel vehicles from 2030 onwards. Tata Motors-owned JLR has a substantial presence in the UK (around 20 per cent of volumes). Preponing of the ban on the sale of petrol & diesel vehicles in its home market will lead to further quickening of pace of portfolio change, electrification related capex spends at JLR, the brokerage firm said.

“We upgrade Tata Motors to BUY (ADD earlier) as the OEM will benefit from an improving demand outlook, cost-cutting initiatives, and better FCF generation. JLR’s retail volumes are improving from Covid lows, and system inventories are normalising. We are building in double-digit volume growth at JLR over FY22/23E (12/11 per cent). The luxury OEM has turned FCF positive (+GBP 463m in 2Q), a trend which we expect would sustain over FY22/23E,” analysts at HDFC Securities said in the company update.

The loss-making India PV business has turned the corner and reported a positive margin, driven by robust market share gains. This will improve domestic cash flows and make the PV business more attractive for potential partners, the brokerage added.