Tata Motors is vulnerable to near-term headwinds, say analysts

Its net worth has shrunk again; leverage ratio is up to a decade high

Tata Motors has been one of the top-performing index stocks during the pandemic period. The Mumbai based automaker’s stock price is up 343 per cent since the end of March last year against a 69.3 per cent and a 74.8 per cent rise in the Sensex and the Nifty50, respectively. The rally in Tata Motors was driven by expectations of a sharp rebound in the company's revenue and profits in the second half of FY21 after a poor showing in the previous three years.

The company's results for Q4FY21, however, suggest that investors are in for a long haul and there's no quick fix to the company's operational and financial problems at its Jaguar Land Rover (JLR) division, which account for nearly 80 per cent of its net sales.

"Tata Motors performance in Q4FY21 was a mixed bag as the overall operating performance was in line. JLR's performance was restricted by an adverse mix despite a sharp beat in volumes," wrote analysts at Motilal Oswal Securities.

According to the brokerage, the first quarter of FY22 would be challenging for both domestic business and JLR division of Tata Motors.

The market didn’t take this positively, especially given the 15 per cent rally in the past two weeks and the stock doubling in the past five months. On Wednesday, Tata Motors was the biggest loser among Nifty50 companies, down 5.5 per cent against a 0.5 per cent decline in the Nifty.

Kotak Institutional Equities is cautious on the company’s prospects. “We believe the JLR business is trading at expensive valuations. We believe competition is quite aggressive in the electric vehicle space and JLR will launch its pure electric vehicle much later than the competition, which can lead to market share loss. Also, JLR’s investment in the EV space is quite weak as compared to other global players,” it adds.

The company reported a consolidated net loss of Rs 7,605 crore in Q4FY21, lower than the net loss of Rs 9,894 crore a year ago, but far from the net profit of Rs 2,906 crore in the December 2020 quarter. Losses for the full financial year ended March 2021 widened to Rs 13,451 against a loss of Rs 12,071 crore in FY20. While the company said the losses in Q4FY21 and FY21 were not operating losses but an impairment in JLR assets, they translated into the second annual decline in the company's net worth or shareholder equity in the past four years.

Consolidated net worth or equity was down 12.2 per cent to Rs 55,247 crore at the end of March 2021, from Rs 63,079 crore a year ago. The company's consolidated equity is now down 42 per cent from its all-time high of Rs 95,428 crore at the end of March 2018.

A contraction in equity means that post-results, Tata Motors stock is now more expensive on the price-to-book value basis than before despite a fall in its share price on Wednesday, raising the possibility of a further decline in its share price. 

A decline in Tata Motors net worth also means that its balance sheet leverage or gross debt to equity reached a 10-year high of 2.1x at the end of FY21 against around 2x a year ago. This may also weigh on the company's valuation in the near-to-medium term.

The company, however, reported a cash profit of around Rs 10,000 crore in FY21 on a consolidated basis higher than the cash profit of Rs 9,355 crore in FY20. The net loss in Q4FY21 was, however, nearly 10 per cent less than the Street consensus estimates, while sales were slightly ahead of estimates.

Net sales were up 42 per cent YoY in Q4FY21 to Rs 87,772 crore – the company’s highest-ever quarterly figure. Annual net sales in FY21 was down for the second consecutive year which meant more work for the management to put the company back on a sustainable growth trajectory.

Some analysts find Q4FY21 numbers encouraging and expect the company to do even better in FY22, thanks to mass vaccinations and the end of Covid-19 lockdown in JLR’s principal markets of China, the UK, the US and mainland Europe.

"The performance was ahead of our estimates on the margin front and was attributable to savings in other expenses, with a 15.3 per cent margin at JLR being the highlight," wrote Pankaj Pandey of ICICI Securities.

According to Pandey, the commentary on near-term demand is cautious across geographies but the management guidance to maintain the Ebit margin of 4 per cent or higher at JLR in FY22 is encouraging.

The stock is currently trading at a price-to-book value of around 2x -- the highest in the last four years but lower than its 15-year average valuation ratio of 2.4x, making it vulnerable to near-term headwinds.