Margin pressures at Tata Motors PV may offset strong India demand outlook

Strong domestic volume growth and new launches support Tata Motors PV's outlook, but raw material inflation and headwinds at JLR could keep near-term margins under pressure

The June quarter (Q1FY27) results of Tata Motors Passenger Vehicles (TMPV) were weighed down by margin pressures at Jaguar Land Rover (JLR) as well as the domestic or standalone operations.

 

While consolidated revenues were up 9.3 per cent year-on-year (Y-o-Y), margins were lower by 120 basis points (bps) to 7.4 per cent.

 

The fall in operating profit and margins was sharper on a sequential basis even as revenues also saw a 9 per cent fall compared to the March quarter.

 

While brokerages are positive on the volume outlook for the India business, margin pressures are expected to remain in the near term. Given the near-term volume and margin outlook for JLR, the stock shed 4 per cent in trade to end the day at ₹334.2 per share. The TMPV stock was the top loser in the BSE 100 on Friday.

 

Led by a 46 per cent jump in volumes and an uptick in realisations, the revenues of the Indian passenger vehicle business jumped by 66 per cent and were above estimates.

 

Though operating profit saw a 74 per cent jump Y-o-Y, margin improvement was limited to 20 bps at 4.2 per cent (lower than estimates).

 

Profitability was under pressure given the sharp rise in input costs and a higher share of the electric vehicle mix.

 

Going ahead, the company expects higher double-digit growth for the India business in FY27.

 

This would be led by festival sales, new launches and product refreshes.

 

While supply constraints especially forgings/sheet metals are improving they continue to remain a focus area of the company. The inventory is at 30 days and the company is looking to build stocks ahead of the festival season. Given the international expansion, especially Africa, exports from India are expected to double in FY27.

 

What could offset the positive on the demand front is raw material inflation which had a 4.5 per cent impact on margins in Q1. It is expected to impact Q2FY27 profitability by another 3.5 per cent.

 

The company is trying to offset this partly by cost reductions, value analysis/value engineering and Indian Premier League (IPL) cost normalisation.

 

This is expected to offset the incremental raw material inflation resulting in flat margins on a sequential basis in Q2FY27.

 

JM Financial has an ‘add’ rating on the stock with a target price of ₹375. Factoring in the Q1FY27 performance, the brokerage is revising domestic PV business volume growth to 16.5 per cent for FY27 compared to 12.3 per cent earlier.

 

Given the raw material prices, Nitin Agrawal and Sahil Malik are adjusting the FY27 operating profit margin for the India business to 6.8 per cent from 8.3 per cent earlier.

 

For JLR, temporary supply chain constraints due to fire at a component supplier, the West Asia disruption and planned winding down of legacy Jaguar models ahead of new launches led to 9.2 per cent Y-o-Y decline and 16.8 Q-o-Q fall in wholesale volumes.

 

Average selling prices, however, were up sequentially by 4.5 per cent on account of a richer product mix.

 

Earnings before interest, taxes (Ebit) margins were lower by 110 bps Y-o-Y and 640 bps sequentially to 2.8 per cent.

 

They were impacted by negative operating leverage and higher variable marketing expenses.

 

While JLR saved on account of US-UK tariffs reducing from 27.5 per cent to 10 per cent, it was partially offset by a one-time US emissions’ provision release for Federal Corporate Average Fuel Economy in Q1FY26 (adverse base).

 

Free cash flow for Q1FY27 was a negative pound 998 million compared to pound 829 million positive cash flow in Q4FY26.

 

Motilal Oswal Research has a sell rating on the stock as JLR continues to face multiple headwinds on the demand and cost fronts.

 

While JLR has embarked on a major cost-reduction initiative, it is likely to only help partially offset the current headwinds, point out analysts led by Aniket Mhatre of the brokerage.

 

Given the significant challenges at JLR and the continued geopolitical uncertainty, they reiterate a ‘sell’ rating with a target price of ₹310.