Tata Motors Q3 Review:  JLR's Improved Volumes, Strong CV Operations To Aid Performance

Shares of Tata Motors Ltd. gained the most in over eight months after the automaker swung to a profit after seven consecutive quarters of losses, with analysts expecting volumes to inch up in the coming quarters.

The gradual improvement in volumes at the UK-based subsidiary Jaguar Land Rover and the strong performance of the commercial vehicle business will ensure Tata Motors' robust operating performance in the coming quarters, analysts said. They have also raised the carmaker's consolidated estimates for FY23 because of how well the company did in the third quarter.

The automaker's consolidated net profit stood at Rs 2,957.7 crore for the third quarter, against a net loss of Rs 1,516.1 crore in the same quarter last year. This compares to the Rs 368.7 crore consensus estimate of analysts tracked by Bloomberg.

Highlights (Consolidated, YoY)

• Revenue rose 23% to Rs 88,488.6 crore against an estimate of Rs 83,280 crore. 

• Operating profit rose 53% to Rs 10,820.2 crore, compared to a forecast of Rs 6,640 crore.

• Operating margin stood at 12.2%, as against 9.8% last year, and an estimate of 8%.

"Although there continue to be supply chain and other macro risks, our guidance for the full year remains unchanged," JLR said in the release. "Positive EBIT margin and free cash flow in Q4 FY23 on wholesales of 80,000 units or more are expected to achieve breakeven free cash flow and a positive EBIT margin for the full year."

"Realisation improvement coupled with commodity softening and cost control resulted in improved margins," said Girish Wagh, executive director at Tata Motors, in a statement. 

The management of the luxury carmaker lowered its guidance for the fiscal year ending March after constrained chip supply continued to limit production in previous quarters.

JLR's strong order book also augured well for the company, analysts said. As of Dec. 31, 2022, the total order book increased to 2.15 lakh units, up around 10,000 orders from the September quarter.

However, Tata Motors now believes its near-net-debt zero targets by FY24 would be a stretch for JLR, whereas the India businesses are on track to attain the same.

Shares of the company jumped as much as 8.2% to Rs 453.4 apiece, the most since May 13, 2022. It ended Friday 6.3% higher at Rs 445.6 apiece.

Of the 33 analysts tracking the company, 24 maintain 'buy', six suggest 'hold' and three recommend 'sell', according to Bloomberg data. The return potential of the stock implies a upside of 12.2%.

Here's what brokerages made of Tata Motors' Q3:

• Maintains a 'buy' rating with a target price of Rs 525, implying an upside of 25%.

• Tata Motors' Q3 operating performance was a beat, driven by strong mix benefits for Jaguar Land Rover and lower discounts in the India commercial vehicle business.

• JLR is seeing strong demand, which augurs well for FY24 performance as supply has gradually improved. India CV should continue to benefit from good demand and focus on the demand-pull strategy.

• Tata Motors should witness a gradual recovery as supply-side issues ease (for JLR) and commodity headwinds stabilise for the India business. It will benefit from a macro recovery in India, company-specific volume and margin drivers, and a sharp improvement in free cash flow and leverage in both JLR and the India business.

• Maintains a 'buy' rating with a target price of Rs 520, implying an upside of 24%.

• The key takeaway from JLR's results is that its EBIT margins remained positive at 3.7%; expect Q4 wholesales to be better, driven by a healthy orderbook, positive free cash flow, and guidance for FCF breakeven in FY23.

• Not seeing major cuts in demand for premium passenger vehicles globally yet, indicating a gradual volume ramp‐up ahead.

• On the negative side, management indicated an increase in variable marketing expenses spend ahead, which should be margin neutral as the same will result in higher volumes and revenues.   

• We like Tata Motors given its improving India franchise, early leadership in electric vehicles in India, and JLR’s aggressive cost controls. The standalone business is in a good place, thanks to a healthy cyclical recovery in both passenger and commercial vehicles, while favourable product cycles contribute to JLR's outperformance. 

• Maintains a 'reduce' rating with a target price of Rs 415, implying a potential downside of 1%.

• Although headline numbers at JLR suggest a margin beat relative to expectations, the beat is led by higher capitalised costs.

• The decline in gross margin QoQ despite the best-ever mix has been a negative surprise. In India, while CV business performance has been impressive, PV business margins have been in line, and Tata Motors Finance has again disappointed.

• Despite what management has done, JLR's debt level of 7.6 billion pounds has stayed the same since FY22.

• The benefits of an improved mix are likely to be offset by the expected rise in material costs. Incremental margin headwinds include the rise in employee costs as wage negotiations are due, and they deploy more engineers to build future capabilities. They also have higher marketing expenses for slow-moving models.

• Investments are likely to inch up to 3 billion pounds in FY24. Both of the above factors would limit JLR’s ability to pare debt.

• In India, the best of the PV and CV cycles seems to be behind us, given rising inflationary pressures.

• Maintains a 'buy' rating with a target price of Rs 608 per share, implying an upside of 45%.

• JLR is on course to end the year with a positive free cash flow of 100 million pounds.

• Price hikes due to the pass-through of emission norms and the risk of another round of commodity inflation would pose a challenge to the CV margin in the first half of FY24.

• Kept estimates for any of the businesses unchanged.

• Maintains an 'add' rating with a target price of Rs 450, implying an upside of 7%.

• Higher realisations and margin improvements in the commercial vehicle business will continue to aid the company's operating performance.

• Expect a gradual recovery in volumes over FY2022–24 at JLR despite a favourable base and strong order book, mainly on concerns of a slowdown in developed geographies.

• Raised consolidated Ebitda estimates by 5% for FY23. 

• Maintains 'buy' rating, target price reduced from Rs 521 to Rs 508, implying an upside of 21.2%.

• JLR Q4 volumes may be 85,000 and improve further in FY24. Mix should remain strong and China demand is rebounding. There is no pressure on incentives.

• In the commercial vehicles segment in India, the company’s strategy to lower discounts is working well. The demand outlook is positive. In passenger vehicles, demand may normalise now as pent-up demand is released.

• Key risk: While JLR valuation is <10% in sum-of-the-parts, if it turns free cash flow negative, that could have a larger impact on multiples for the overall company.