After a 21 percent jump just in 2023 YTD, domestic brokerage house Ventura Securities sees another over 50 percent potential upside in the auto major Tata Motors in the next 30 months.
The brokerage has a buy call on the stock with a target price of ₹715, indicating an upside potential of 53.5 percent from the current market price of ₹465 (as on April 13, 2023).
"We are expecting a strong recovery in Tata Motor's financials as supply-side issues are relaxing (for JLR) and commodity headwinds are easing (for passenger and commercial vehicles). It could improve the margin profile of the company and enhance its free cash flow generation," it said.
The brokerage noted that Tata Motors' sales volume numbers for the March quarter of FY23 (Q4FY23) exceed its expectations by 6.2 percent in the commercial vehicles (CV) business to 1,14,544 vehicles and by 5.6 percent in JLR (Jaguar Land Rover) to 1,07,386 vehicles.
However, it further informed that the passenger vehicle (PV) volumes for the auto firm came in marginally lower at 1,35,654 vehicles compared to its expectations of 1,48,990 vehicles in Q4FY23.
"JLR numbers were primarily driven by 32.1 percent YoY growth in Land Rover volumes to 91,887 vehicles, while Jaguar continued to lag and recorded a YoY decline of 20.8 percent to 15,499 vehicles. UK, Europe and the rest of the world recorded YoY JLR volume growth of 24.2 percent (to 20,321 vehicles), 22.3% (21,982 vehicles) and 62.4 percent (21,043 vehicles) respectively in Q4FY23, while North America and China delivered single-digit growth of 1.7 percent (to 19,296 vehicles) and 8.1 percent (24,744 vehicles) respectively," Ventura stated.
Also, all 3 business verticals of Tata Motors are in recovery mode, it added.
Going ahead, the brokerage expects the India CV business of Tata Motors to witness a cyclical recovery due to the pick-up in M&HCV (medium and heavy commercial vehicle) demand in India from infrastructure and mining. JLR is also witnessing a cyclical recovery, which is supported by a favourable product mix and electrification of the portfolio, predicted the brokerage.
Though the Q4FY23 PV volumes came lower than its expectation, the India PV business is seeing a structural recovery with new models and rising EV demand, said the brokerage. It is also expecting a healthy growth trajectory for Tata Motor’s PV business.
On account of better-than-expected sales volume in Q4FY23, the brokerage has also improved the forecasted financials for the firm. Now, as per the brokerage, the consolidated revenue and EBITDA are expected to grow at a CAGR of 16.8 percent to ₹5.18 lakh crore and 33.1 percent to ₹73,361 crore, respectively over FY22-26E, while the blended EBITDA margin is expected to improve by 577 bps to 14.2 percent.
Meanwhile, net earnings are expected to scale to ₹23,023 cr (compared to the loss of ₹11,441 cr) and net margins to reach 4.4 percent by FY26E, it forecasted.
In the December quarter, the company turned profitable after 7 straight quarters of losses. It posted a consolidated net profit of ₹2,958 crore for the quarter ended December, against a loss of ₹1,516 crore in the year-ago period.
Meanwhile, its consolidated revenue from operations rose 22.5 percent YoY to ₹88,489 crore. EBITDA increased 11 percent YoY to ₹9,900 crore and the margin improved 90 basis points to 11.1 percent.
Its arm Jaguar Land Rover Automotive also reported a strong 28 percent growth in revenue to 6.04 billion pound sterling, and its EBIT margin expanded a sharp 230 basis points YoY to 3.7 percent.
Going ahead, Tata Motors remains cautiously optimistic about the demand situation despite global uncertainties.
“We will remain vigilant on demand and our continued focus on profitable growth, improving semiconductor supplies and stable commodity prices will aid revenue growth, margin improvement, and positive cash delivery in Q4,” the automaker said.
Overall in Q4FY23, Axis Securities anticipates a slight improvement in gross margins for both auto OEMs (especially of commercial vehicles and passenger vehicles) and ancillary companies as a result of the drop in commodity prices during Q3 FY23. Auto OEMs' revenue is expected to grow by 8% QoQ in Q4 FY23, primarily driven by double-digit growth in the commercial vehicle (CV) and passenger vehicle (PV) segments.
However, this growth may be partially offset by lower growth in the two-wheeler (2W) segment (led by lower exports) and tractors, it said.
Although the brokerage maintains a positive outlook on the auto sector for FY24, it anticipates a more challenging landscape ahead. This is due to the subsiding of pent-up demand from FY23 over the low base of FY22 across segments.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
