Tata Motors: Positives fully priced in, analysts still upgrading the stock

Company expects to improve EV penetration and expand margins in CV segment

There is no impediment to normal operations as Tata Motors puts in place the demerger process of its commercial and passenger vehicles businesses. Instead, the demerger would provide greater manoeuvrability for both new entities to operate independently, according to Tata Motors management. While there may not be immediate value unlocking, it will give investors clarity about future growth and the financials across different segments.

Globally, volume recovery in Jaguar Land Rover (JLR) suggests there is likely to be strong growth in revenue, profitability, and free cash flow (FCF). There is also a focus on grabbing market share in the domestic passenger vehicle (PV) segment through new model launches and higher electric vehicle (EV) penetration, where Tata Motors has a dominant market-share. The company also hopes for margin expansion across the commercial vehicle (CV) segment.

JLR’s wholesale numbers (excluding the China joint venture) for the January-March quarter (Q4) of FY24 came out at 1,10,190 units (up 9 per cent quarter-on-quarter (Q-o-Q) and 16 per cent year-on-year (Y-o-Y)) which is in line with consensus. Retail sales (including the China JV) in Q4 was up 11 per cent Y-o-Y at 1,14,038 units. Retail sales in FY24 grew 22 per cent over FY23 with Land Rover retails growing at 25 per cent.

The UK contributed 25.2 per cent of volumes (vs 20.9 per cent in Q3FY24 and 21.5 per cent in Q4FY23). Volumes in North America and Rest of World (RoW) grew 11-15 per cent Q-o-Q, while volumes in Europe and China declined 7 per cent and 13 per cent Q-o-Q, respectively. For the full year FY24, the share of North America, UK and RoW grew by 100-200 bps each while Europe and China declined.

In Q4FY24, JLR may report revenue of GBP 7.9 billion with average selling price (ASP) of GBP 72,000 per unit and Ebitda of GBP 1.3 billion (margin of around 16.8 per cent). The FCF generated is expected to cross GBP 700 million equivalent in Q4 (Q3FY24 FCF was around GBP 650 million). The improvement will be due to higher Ebitda on Q-o-Q basis (operating leverage) and another GBP 200-300 million FCF as working capital normalises with better production levels. Overall FCF of GBP 2.1 billion in FY24 could come in from JLR with net debt for JLR to reduce to GBP 900 million by end-FY24 (from GBP 1.6 billion in December 2023).

The company is confident that the domestic PV business will be self-sustaining going forward after the demerger of the CV business. It sees higher competitive intensity in the EV passenger vehicle space but it hopes to see pole position as the EV segment expands and targets 30 per cent revenue contribution from EVs by FY26.

Tata Motor Finance, which largely caters to CVs, is expected to be a part of the demerged CV entity. In the CV segment, wholesale volume has moderated while Q4 retail sales have been good due to pre-buying ahead of a price increase which took effect in April. CV volumes should rebound strongly from H2FY25, due to the government's focus on infrastructure as CV is linked to the construction capex cycle. Tata Motors (Standalone) is hoping to score a double-digit Ebitda margin for FY25.

Analysts are still upgrading the stock, which has moved up by over 140 per cent in the last year. However, much of the cyclical uptick is already priced in. According to Bloomberg, 9 out of 14 analysts polled in April are bullish on the stock; 3 have ‘reduce’ rating, and 2 are ‘neutral’. Their average one-year target price is Rs 1,021, versus the current price of Rs 1,018.35. Consistency of execution in JLR and a smooth demerger of the segments will be crucial.