 "Semi-conductor shortages: Why did Tata Motors’ warning spook investors?")
It’s rare for a company’s stock to see its fortunes swing sharply in a single trading day. But that’s what happened to Tata Motors’ share in a matter of a few hours. The stock opened at Rs 346.1 and rose to Rs 358.1 on news of a price hike in the commercial and passenger vehicle range of the India business.
But the euphoria was short-lived. Later in the day, Jaguar and Land Rover Automotive Plc (JLR), Tata Motors’ UK subsidiary, issued a profit warning for the forthcoming quarters on account of the severe shortage of semiconductors. JLR accounts for half the company’s global unit sales and nearly 80 per cent of its consolidated revenues.
Led by a higher-than-expected shortage of semiconductors, it said volumes in Q1 and Q2 would be around 25 and 50 per cent lower than original plans. As a result, both quarter would record EBIT (earnings before interest and tax) loss and negative free cash flow to the firm (FCFF) of approximately GBP 1 billion each.
The company’s statement was in sharp contrast to the earlier guidance of a free cash flow break-even and 4 per cent-plus earnings before EBIT. No surprise, the stock slumped over 10 per cent to Rs 311.5 hitting the lower circuit. It recovered a bit and closed at Rs 317.1. Before this announcement, the year-to-date gain for the company was 94.9 per cent.
But JLR is not the only company that is struggling to meet production schedules due to the severe shortage of semiconductors or chips. Direct rivals — BMW, Mercedes-Benz AG, Audi AG — have cautioned the investors about a lower output. An automotive chip shortage began in December as demand for personal devices soared amid pandemic lockdowns and has persisted through 2021 with a factory fire at a major manufacturer in Japan and frigid weather in the US exacerbating the crisis.
What explains such a sharp reaction from Tata Motors’ investors?
Mahantesh Sabarad, head-Retail Research, SBICAP Securities, said, “A billion-pound outflow cannot merely be borne out of a chip shortage.” In fact, other companies are not seeing such a sharp fall. Plus, the warning comes within a few weeks of a very positive guidance. “There is a lot more to it than what meets the eye,” he added.
A few weeks before, JLR CEO Thierry Bollore wrote in a letter to shareholders in the Tata Motors Annual Report for 2020-21, “Our goal is to deliver a double-digit EBIT margin and become one of the world’s most profitable luxury manufacturers.”
The maker of the Range Rover, Jaguar F Type models has been firing on all cylinders for the last couple of years to get business back on track. Covid-19, stricter emission regulations, changing buyer preference have all impacted performance.
As part of the turnaround, Tata Motors took an exceptional loss of nearly $2 billion related to JLR in the March quarter. This included a write-down of assets worth Rs 9,606.1 crore on account of cancelled models and restructuring costs worth Rs 5,388.2 crore. As part of the Reimagine Strategy crafted by Bollore, it is sharpening focus on electric models and consolidating the number of platforms.
Investors have been taken by the surprise announcement and cut their estimates. In a July 7 report, Kapil Singh, analyst at Nomura, wrote that the impact of the chip shortage in the first half of FY22 is much higher than the brokerage’s expectation. Nomura has put its FY22 volume estimates of approximately 483,000 units at risk by more than 10 per cent, especially if the impact remains significant in the second half of the fiscal.
“We believe that there is a risk of delayed launch of the new Range Rover as well. Given negative FCF (free cash flow) our FY22F debt assumptions have an upside risk as well. We will track management commentary on FY22F volume guidance,” wrote Singh.
Singh said the impact of the chip shortage on JLR is much higher than what other luxury players have reported. For instance, BMW commented it has only lost 30,000 units (around 2.5 per cent of first half of 2021 volumes) due to the chip shortage in the first half of 2021 but expects further impact later in the year. Daimler also indicated its deliveries were impacted in June and expects this to continue over the next two quarters.
Some are seeing light at the end of the tunnel. “We have cut our FY22 consolidated EBITDA estimate by 14 per cent and EPS (earnings per share) by around 50 per cent. However, we have largely maintained our FY23 earnings estimates. While H1FY22 would be tough, we expect a sharp recovery in the subsequent period,” wrote Joseph George, analyst at IIFL.
Investors are retaining their FY23 outlook on the back of a strong retail demand. It is evident from the build-up of a strong order book. Dealer inventory is getting depleted and would need replenishment. “Launch of the all-new RR and RR Sport would be strong volume/ earnings drivers in FY23. The stock may be under pressure in the near-term. However, we expect it to rebound once the chip shortage eases and volumes revive,” wrote George in a July 7 report.
What JLR says
A day after the carnage in the markets, the company sought to assuage investor concerns. “We see cash flows improving significantly in the second half of the year,” said Adrian Mardell, JLR’s chief financial officer. Explaining the sudden change in outlook, he said visibility regarding chip supplies came in only a few days back. “I can assure you we are talking to engineers and suppliers every day to speed up supplies,” he said, adding that JLR has record orders of 110,000 units and the company has no plans to delay new model launches because of the current situation.
As for cancellations, he said those have been very few, only in tens. “The bigger concern is not cancellation but supplies of chips,” Mardell said in response to a question on whether the company will see cancellations as chip supplies seem to be a bigger concern for JLR than its rivals. Mardell said he was confident that JLR could achieve the 4 per cent-plus EBIT it had guided for earlier (at the end of Q4) when chip supply issues are resolved.
