Tata Motors shares slip 6% after UBS maintains 'sell' with target of Rs 825

Shares of auto giant Tata Motors slumped 6 per cent to Rs 976 on the BSE on Wednesday after international brokerage UBS maintained its ‘sell’ rating on the stock with a sum of the parts (SOTP)-based price target of Rs 825 per share.

The brokerage expects further downside risk from margin slippage at Jaguar Land Rover (JLR) and within Indian passenger vehicles (PVs), especially the electric vehicle (EV) arm.

With Wednesday's correction, the stock of the automobile company has plunged 17 per cent from its record high level of Rs 1,179.05 on July 30, 2024.

Tata Motors manufactures and sells commercial vehicles, utility vehicles, and passenger cars in India. FY24 consolidated sales were mixed with JLR accounting for around 69 per cent, while India CV & PV combined around 30 per cent.

According to analysts at UBS, key downside risks for Tata Motors include a sharp appreciation of the British pound versus the US$/Rmb, a sharp slowdown or decline in China’s sales of JLR for regulatory or economic reasons, and an inability to refinance debt and turn around the India business.

A sharper recovery in global premium markets, JLR’s outperformance in China, strong cost controls driving a margin beat for JLR, a stronger and quicker recovery in freight demand driving higher truck sales, and the emergence of a global partner for the India PV business are key upside risks, the brokerage said.

JLR has had a good run over the last few years in terms of average selling prices (ASPs) and margins thanks to very strong demand for its latest launches: the Defender, Range Rover and Range Rover Sport. These trios have significantly boosted its ASPs and gross margins (GM).

JLR has used the semiconductor shortage to ration production in favour of these models, which have further lowered its dependence on lower priced/margin models. However, the extended successful run of these models has started to moderate and the order book is now below pre-COVID levels, the brokerage firm said.

Meanwhile, Tata Motors in June quarter (Q1FY25) earnings call said the company anticipates gradual improvement in domestic demand during the rest of the year on account of continued investments in infrastructure, healthy monsoons, favorable macros and festive demand. Global demand is likely to remain muted. Commodities are likely to remain range-bound, the company said.

JLR has maintained its guidance of >8.5 per cent earnings before interest tax (EBIT) margin in FY25, while it projects 10 per cent for FY26. Headwind for the JLR business would be short supply of aluminium from a supplier in Q2-Q3. Global demand is likely to remain muted, with sales in China and the EU to remain strained, according to analysts at Elara Capital.

Last month, the global rating agencies Moody's Ratings and S&P Global Ratings upgraded the credit rating of Tata Motors.

Tata Motors' two-notch rating upgrade with a positive outlook follows the company's sustained track record in achieving revenue growth, improving profitability, and reducing debt using its large free cash flow, despite its elevated capital expenditure to refresh its products, said Moody’s Ratings.

S&P Global Ratings expects Tata Motors' debt to continue to decline steadily, supporting the upgrade. “The stable outlook reflects our expectation that Tata Motors will maintain a strong balance sheet backed by sound operational performance. The outlook also reflects JLR continuing to make progress on its transition to producing electric vehicles, including the launch of an electric Range Rover model by the end of the year,” the rating agency added.

A slowdown in the global automobile market, renewed supply chain issues such as with aluminum that JLR currently faces, and potential missteps in JLR's electrification strategy are key risks to Tata Motors' deleveraging.

However, given the extent of debt reduction the company has executed, S&P Global Ratings views these risks as manageable and unlikely to weaken the company's 'bb' stand-alone credit profile (SACP).