New launch success, Jaguar Land Rover margin key for more gains in TaMo

The stock of auto major Tata Motors is up 11 per cent since its monthly lows, with half of those gains coming in the last three trading sessions. Restructuring of domestic operations over the next year, new launches, higher sales at subsidiary Jaguar Land Rover (JLR), and further deleveraging are key triggers for the stock.

In the domestic passenger vehicle (PV) business, the company’s PV volumes in June declined 8 per cent year-on-year (Y-o-Y) and were below estimates. The company indicated that it has proactively reduced wholesales to keep channel inventory under control amid weak retail demand. Nomura Research believes that there is significant growth potential in the medium term driven by three levers: market share, average selling price, and margins. The company is eyeing an expansion of its market share to 18-20 per cent by FY30 from 14 per cent in FY24. This is expected to be achieved by traction in the existing portfolio as well as new launches, enabling the company to grow at twice the industry rate of 6-7 per cent.

While the current addressable market of the company is 53 per cent of the PV space and the company has a 26 per cent share, it seeks to take the addressable market to 80 per cent. This will be achieved with the launch of Curvv and Sierra, which will help fill product gaps in the mid-size sports utility vehicle segment. The company has also lined up the launch of a compressed natural gas variant of Nexon and an electric vehicle (EV) version of Harrier and Safari.

In the internal combustion engine business for PVs, the company plans to improve its cash flows by increasing its market and targets a double-digit operating profit margin. For the electric vehicle business, it seeks to break even at the operating level by FY26.

The demerger of the commercial vehicle business is another step which, according to the company, is expected to unlock value for shareholders as there are limited synergies between the two business segments. However, there are significant synergies within the car segment which can be leveraged across the group portfolios of PVs and EVs, both for the domestic market as well as JLR operations, especially on the technology front. While the PV business will stay in the core company, the commercial vehicle segment will be demerged into a separate entity. The timeline for the restructuring is about a year.

In the CV business, the company is eyeing a gradual increase in market share, double-digit operating profit margin, ramping up non-vehicle business, and is targeting free cash flow of 6-8 per cent of revenue, resulting in a strong return on capital employed.

For JLR, the company wants to scale up its revenues in the long term from £29 million in FY24 to £38 billion. Its margin target is 15 per cent from 8.5 per cent in FY24, and it seeks to generate free cash flow (FCF) of £3 billion. What could incrementally add to the revenues are the launch of three new EV products in FY25—the Range Rover Electric, the Jaguar Electric, and the first EV on the electrified modular architecture (EMA) platform.

The company has revised its guidance on investment spends to £18 billion over FY24-28 from £15 billion earlier due to higher investments in the EV business.

Some brokerages, however, have a cautious view on the stock. Analysts led by Aniket Mhatre of Motilal Oswal Research, while stating that Tata Motors has delivered an extremely robust performance across its key segments in FY24, indicate clear headwinds ahead that could hurt its performance, especially at JLR. They cite rising cost pressure as it invests in demand generation, normalising mix and EV ramp-up, which is likely to be margin-dilutive.

Nomura Research believes that any further rerating would depend on the success of new EV models and the ability to sustain JLR margins.

Analysts led by Jay Kale of Elara Research point out that JLR’s long-term target of a 15 per cent margin is aggressive and a lot hinges on how its EV products are accepted, especially when EV profitability for global peers has been a cause for concern. With the net debt issue behind it, management’s focus on a return on capital employed target of over 22 per cent in FY25 is a positive and will be a catalyst, although the near-term demand and FCF outlook for Q1 remains muted.