Tata Motors rides high on JLR volume, margin expectations

From its lows in December, the stock of Tata Motors is up about 15 per cent.

The gains came on the back of better than expected December volumes in its UK-based subsidiary Jaguar Land Rover (JLR).

This coupled with gradual recovery in the global passenger vehicle demand, improving profitability due to product mix and lower commodity costs are expected to be key positives for the company.

The main trigger for the stock is the volume trajectory for JLR.

Its wholesale volumes in the December quarter, excluding the China joint venture, grew 27 per cent over the year ago quarter to 101,043 units.

The volumes on the back of an easing supply situation was the company’s highest wholesale performance in the past eleven quarters.

Growth was led by Range Rover Sport (49 per cent higher) followed by Defender at 14 per cent and Range Rover (12 per cent).

Wholesales volumes year-to-date came in at 291,113 units, up 28 per cent y-o-y.

The order book continues to remain robust at 148,000 units at the end of the third quarter and is down from 168,000 at the end of the second quarter.

Higher order fulfilment on the back of better supply has reduced the waiting period.

Demand for Range Rover, Range Rover Sport and Defender remains particularly strong, representing 76 per cent of the order book, says the company.

Morgan Stanley Research highlighted that the December quarter mix has remained strong given that the three models form 62 per cent of wholesale and 76 per cent of the order backlog of the company.

Given the higher volumes and operating leverage as well as improved mix and stable raw material costs, Q3 margins for JLR are expected to improve 10 basis points sequentially to 7.4 per cent.

The brokerage has an overweight rating on the stock with a target price of Rs 890 a share.

Even as JLR volumes are expected to remain robust in Q3, led by easing chip shortages and improved demand for new models, the domestic performance could be a mixed bag.

Commercial vehicle (CV) volumes in Q3 are expected to remain flat Y-o-Y while PV sales exhibit 5 per cent growth.

Motilal Oswal Research expects CV segment margins to contract by 70 basis points sequentially to 6.5 per cent on lower volumes, while PV margins could see a slight improvement due to cost control measures and stable volume.

Amber Shukla and Aniket Desai of the brokerage believe that the growth in JLR is likely to be supported by gradual recovery in global passenger vehicle demand, a strong order book, and a favourable product mix.

They, however, expect that growth to moderate in the domestic passenger vehicle (PV) and CV businesses in the coming years due to normal base and slowdown in the lower end PV and light CVs.

The brokerage has a ‘buy’ rating with a target price of Rs 900 a share.

The company is the top pick of CLSA Research in the auto space.

Hitesh Goel of the brokerage expects Tata Motors’ margins to improve as production volumes scale up and commodity costs decline.

Key catalysts according to the brokerage are increased production levels of JLR in 2HFY24, market share gains in the domestic PV business in FY25 led by new launches, and sustaining double-digit operating profit margin in the domestic CV business.

JP Morgan has upgraded the stock on account of balance sheet deleveraging.

The brokerage believes that deleveraging will reduce earnings per share volatility and lead to potential rerating.

It has increased the FY25-26 net profit by 20-30 per cent.

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