Tata Motors' stock has been flat for the last 1 year, but the muted trend for the auto major seems to be coming to an end now. In a recent report, brokerage house Motilal Oswal has maintained its ‘buy’ call on the stock with a target price of ₹540, implying a potential upside of over 31 percent.
As per the brokerage, while its India businesses are already on a sustainable growth path, Jaguar Land Rover (JLR) is turning the corner and would be the key driver of the stock in the future. JLR’s luxury premium positioning was largely achieved, which is a key positive, noted MOSL.
"As supplies improve, JLR should reach near the zero net debt level by FY25, aided by improved production, better margins and working capital release. JLR will structurally continue its journey from being a premium brand to a premium luxury brand by focusing on its brand pull strategy and redefining Jaguar with premium positioning in the era of EVs with new launches starting from CY25," said the brokerage.
Further, the monetization of its stake in Tata Technologies (possible value of ₹25-47/share for Tata Motors) could also act as a catalyst for the stock, it added.
The brokerage stated that the management is prioritizing JLR's revenue over volume to gauge progress. Its revenue is only 15 percent below the FY18 peak even as volumes are down 43 percent, informed MOSL. JLR will continue to focus on profitable growth and does not just want to be a niche player, said the brokerage.
"The company has purposefully moved away from "pushing" its goods into the market and leveraged supply issues to elevate its standing from premium to luxury premium. The company has defocused on models through its brand pull strategy and is not pushing other models through discounts," said MOSL.
It further pointed out that the management is confident of achieving 10 percent EBIT margin by FY26 (v/s 3.7 percent in 3QFY23), driven by 1) the normalization of many discontinuities like the premium cost of chips, vendor compensation for lower volumes, commodity/energy costs, 2) richer mix, 3) favourable forex, and 4) operating leverage.
Apart from this, MOSL believes that working capital release (negative working capital business) and controlled capex should also help JLR inch closer to the zero net debt level by FY25E (v/s EUR 3.85 bn in Dec’22), which is delayed by a few quarters v/s earlier guidance of FY24.
Another key positive, as per the brokerage, for JLR, is that the supply of chips has been gradually increasing and should continue to improve in FY24 as well. The order book is also strong, led by a stable demand environment and strong brand pull of the recently launched models, it added.
As per the brokerage, stable freight rates, the profitability of fleet operators and data from financiers indicate healthy demand for CV segment, moreover, the anticipation of healthy replacement demand and scrappage policy would be additional growth drivers.
It further noted that the management has been focusing on increasing value through innovations in terms of goods, services and other solutions, rather than increasing the market share through discounts. LCVs, which have witnessed a robust post-Covid recovery, are likely to moderate, it said.
The management indicated that pent-up demand and post-Covid euphoria seen in the PV segment are slowly abating, hence, it expects the PV industry to grow by 5-7 percent in FY24, highlighted MOSL. The company plans to follow an aggressive strategy in the EV segment.
The stock has been flat, down 0.5 percent in the last 1 year but is up over 4 percent in 2023 so far. In the last six months, the stock has declined 4.5 percent.
Currently trading at around ₹411, the stock hit its 52-week high of ₹494.5 on August 17, 2022, and a 52-week low of ₹366 on May 12, 2022.
Overall, the brokerage noted that Tata Motors should witness a gradual recovery as supply-side issues ease (for JLR) and commodity headwinds stabilize (for the India business). It will benefit from 1) a macro recovery in India, 2) company-specific volume/margin drivers, and 3) a sharp improvement in FCF and leverage in JLR as well as the India business.
"The ramp-up in the PV/CV businesses, along with a possible fundraise at Tata Technologies, would help the India business move closer to becoming net debt free by FY24. JLR’s journey to reach closer to the zero net debt level is delayed by a few quarters due to chip shortages (expects to achieve by FY25)," rationaled the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.