Tata Motors: Weaker-Than-Expected JLR Q2 Sales Spark Downside Risks, Says Nomura
Nomura reiterated a ‘buy’ rating on Tata Motors with a target price of Rs 520 apiece.
Tata Motors Ltd.’s British luxury carmaker missing sales guidance in the second quarter, mainly because of supply-chain constraints, has increased downside risks to Nomura’s FY23 volume estimates.
“Wholesale volumes for Q2 FY23 were 75,300 units (excluding China JV), up 5% quarter-on-quarter. Lower-than-expected supply of specialised chips negatively impacted wholesale volumes during the quarter, resulting in Jaguar Land Rover missing its guidance of 90,000 for Q2 FY23,” the research firm said in an Oct. 9 report. The retail sales rose 12% sequentially.
Although JLR volumes improved sequentially, the management’s guidance was missed. This, Nomura said, has increased downside risks to its FY23 volume estimate of 4,14,000 units (excluding China JV) as H1 FY23 volume came in at only 1,47,000 units.
On Friday, JLR, a wholly owned subsidiary of Tata Motors, saw sales decline 4.9% year-on-year to 88,121 units during the quarter ended September. Sale of Jaguar cars declined 9.9% to 17,340 units, while Land Rover saw a 3.6% decline at 70,781 units.
Still, JLR expects the free cash flow to be close to breakeven despite the weaker wholesale volume during the quarter based on its preliminary total cash balance of £3.7 billion (Rs 33,777 crore), Nomura said. “It expects free cash flow for H2 FY23 to be positive, driven largely by sequential growth in wholesale volumes.”
According to Nomura, Tata Motors was able to ramp up production of the New Range Rover and New Range Rover Sport models—the demand for which lifted the company’s total order book to 205,000 units as of September, up 5,000 units from June.
“The impact of semiconductor chip shortages was partially mitigated as the company prioritised production of its highest-margin products,” Nomura said. “The management indicated that it has entered into new arrangements with semiconductor suppliers which should enable improvement in sales in H2 FY23.”
The brokerage also expects JLR’s margin to improve sequentially in the second quarter owing to favourable product mix. It reiterated a ‘buy’ rating on the stock with a target price of Rs 520 apiece—implying a potential upside of 26.2%.
Risks, according to Nomura, that may impede the achievement of the target price are market share loss in India commercial vehicle market and success of electric vehicle launches by competition impacting JLR market share volume growth.
Of the 34 analysts tracking the company, 26 maintain a ‘buy’, five suggest a ‘hold’ and three recommend a ‘sell’, according to Bloomberg data. The average of the 12-month target price implies an upside of 32.1%.
Tata Motors’ stock fell as much as 4.5% on Monday, the most in two weeks. The total traded volume more than doubled the 30-day average. The 14-day Relative Strength Index was 35.06.
The stock has fallen 18% so far in 2022 compared to the Sensex’s 0.4% loss.