Tata Motors: Why UBS says it's a ‘sell’ when other brokerages remain bullish

In a contrarian view to most brokerages, UBS has resumed coverage on Tata Motors with a 'sell' call from 'neutral' earlier, however, it has raised the auto major's target price to ₹450 from ₹320 earlier. Despite the increased target price, it indicates a downside of 13.5 percent from its current market price (CMP) of ₹520 (as on May 24, 2023).

Meanwhile, 33 analysts polled by MintGenie on an average have a 'strong buy' call on the stock.

As per UBS, Tata Motors' negatives are overlooked and the positives are largely priced in. It suggested the market is underestimating JLR's vulnerability amid the rapid electrification of premium cars and one must note that JLR accounted for two-thirds of Tata Motors' sales and Ebitda in FY23.

The brokerage believes that Tata Motor's outperformance in 2023 post JLR's robust earnings, driven by an unsustainable mix and near-zero discounts, is short-lived and provides a good selling opportunity for investors. Also, Tata's domestic market share in cars is peaking with increased competition, it added.

It further observed that at the current price, JLR's implied PE is at a 70 percent premium to BMW AG/Mercedes, despite JLR lagging in financial and technology parameters. UBS highlighted JLR's moderating average selling price margins from the second half of FY24 and India's market share and margin underperformance are key catalysts.

Underestimating the EV risks

UBS believes investors are likely overlooking the significant shift in the global premium car market caused by electrification. It also noted how electrification in China is disrupting the profit pool of global premium brands, and expects the same to play out in other regions. UBS foresees this eroding JLR's margins to about 4 percent in FY25/FY26 versus guidance for double-digit EBIT margins in the medium term. Also, the strategy to put Jaguar centre stage with three new EV models warrants some caution given the lackluster attempts to revive Jaguar in the past, warned UBS.

The brokerage further cautioned against the rapid shift to EV (electric vehicle)/AV (automated vehicles) in key markets and JLR's widening tech/portfolio deficit to peers. JLR is lowest in its EV/AV ranking and UBS believes JLR's R&D and capex investments pale in comparison with large peers, who are raising investments despite their sizeable lead over JLR. While the market is likely pricing in short-term mix/margin gains, it thinks JLR is overlooking the notable shift in the global premium landscape caused by EVs and the potential impact on JLR's franchise.

Domestic market share gains peaking

As per the brokerage, Tata successfully turned around the India PV segment owing to the new model cycle and its differentiated approach of converting Internal Combustion Engines (ICE) to EVs. However, it expects Tata's passenger vehicle (PV) market share to peak as its launch pipeline is much weaker than market leader Maruti's and EV competition is intensifying. Its other competitors also have strong EV launch pipelines, prompting it to revisit Tata's EV valuation, fears the brokerage. In commercial vehicles (CV), the brokerage stated that Tata continues to underperform on volumes and margins, with mounting worries of a CV slowdown.

It also pointed out that Tata Motors lost meaningful market share in CVs in FY23, and UBS does not expect this to reverse in the future. “For passenger vehicles (PVs), we believe Tata's market share has peaked and should start to moderate driven by competitors' easing semiconductor availability and Maruti Suzuki's and Hyundai's product launches,” it stated. 

Meanwhile, on the EV front, the company's market share gains are likely to continue for a few more quarters until the launch of more efficient EVs based on dedicated platforms by large OEMs (we expect eVX from Maruti towards end-2024).

Valuation and View

According to UBS, Tata Motors is trading well above its five-year mean on all valuation parameters. Also, this valuation gap versus larger peers with much stronger balance sheets, such as BMW and Mercedes-Benz Group, has vanished, indicating optimism of JLR's market share recovery and margin improvement, it highlighted.

Positive Views

While UBS believes most positives in Tata Motors are priced in, most brokerages do not share the same outlook for the auto major.

Post its March quarter earnings, earlier this month, brokerages retained their bullish views on the stock.

ICICI Direct Research kept its 'buy' recommendation on Tata Motors with a target price of ₹650 apiece (25% upside), citing healthy profitability across all business segments.

The brokerage expects a healthy 20.1 percent revenue CAGR over FY23–25E, driven by a 10 percent total volume CAGR amid healthy wholesale visibility on the JLR front.

Meanwhile, Jefferies also has a 'buy' call on the stock and raised its target price to ₹665 from ₹600 earlier, indicating an upside of 28 percent. It sees the JLR and India businesses performing well in FY24, thereby driving strong earnings growth and deleveraging.

"By FY25E, we expect EBITDA to be 2.1X of FY23, EPS to rise to an all-time high, and auto balance sheet to turn net cash. Our FY24-25 EBITDA and EPS are 19-20 percent and 55-64 percent above street respectively," it forecasted.

Meanwhile, Nuvama also has a ‘buy’ call on the stock with a target price of ₹620, a 19 percent upside. The brokerage is bullish on the stock on the back of expectations of a cyclical upturn in JLR and India CV/PV segments, notable margin expansion, and debt reduction.

Earnings

In the March quarter, the company reported a strong performance with a net profit of ₹5,408 crore compared to a net loss of ₹1,032.84 crore in the same period of last year. Sequentially, the net profit rose by 83%.

The company also achieved its highest-ever revenue of ₹1,05,932 crore in Q4FY23, up 35 percent YoY and 19.7 percent QoQ. In the quarter under review, JLR also reported a robust YoY volume growth of 24 percent to 94,700.

Overall in the financial year FY23, the company posted a consolidated net profit of ₹2,414 crore, marking a significant turnaround after four consecutive years of losses that began in FY2019. In FY22, the company registered a net loss of ₹11,441 crore. The Tata Group firm also recorded an all-time high revenue of ₹3,45,967 crore in FY23.

Stock price trend

2023 so far has been an exceptional year for Tata Motors, up 34 percent YTD, giving positive returns in 4 of the 5 months of the current calendar year. The stock has gained 5.6 percent in May so far after a 15 percent jump in April. Meanwhile, it was flat (but positive) in March. However, the stock fell 7 percent in Feb. It surged 16.5 percent in Jan.

Meanwhile, in the last 1 year, it has gained 22 percent.

The stock hit its 52-week high of ₹537.15 on May 15, 2023, (after its March quarter results), and its 52-week low of ₹375.50 on December 26, 2022. Till date, it has advanced 38.5 percent from its 52-week low.