Tata Motors: After a bumpy ride in Q1, Tata Motors hopes to raise the tempo in Q2 amid volume improvement

Tata Motors missed street earnings estimates by a wide margin for the June quarter. This was due to the weak performance of its UK subsidiary Jaguar Land Rover (JLR), which contributed approximately 70% to consolidated sales. However, the stock market reaction was measured, with the stock losing about 1% on Thursday, a day after the statement of results. This was due to the company’s expectation that JLR would deliver a significant volume recovery from the September quarter, amid improving chip offerings and better product mix with an increasing share of new models.

JLR’s operating margin before depreciation and amortization (EBITDA margin) declined sequentially by 620 bps to 6.3% due to lower sales volume, lower production of superior margin products, volume reduction in the Chinese market and higher input costs. Wholesale volume excluding China declined 15% sequentially to 71,815 in the June quarter. In addition, the volume growth of higher margin models, such as the new Range Rover and Range Rover Sport, was slower. These two models accounted for almost 17% of the total ex-China volume, compared to 20-30% in the previous quarters.

However, improving chip inventories and the growing order book for new models bode well for JLR. The company is targeting a volume of 90,000 units in the second quarter of FY22, implying a 26% sequential increase. JLR has an order book of approximately 2,000,000 units. Order bookings for Range Rover and Range Rover Sport account for 40% of the total order book and currently account for less than 20% of total sales volume. It means JLR will sell more high-margin models, which can support profitability.

The Street expects JLR volume growth to be 10-15% for FY23. That would require quarterly sales of 84,000 units for the remaining fiscal year. JLR’s volume growth lagged behind other luxury peers, resulting in the loss of market share. Based on a three-year compound annual growth rate (CAGR), JLR volume declined 15%, while BMW, Audi, and Mercedes volumes declined 4-6%. The peers also showed better pricing power. This would limit JLR’s ability to pass on higher prices, even with a revamped portfolio, to keep its product competitive. Therefore, it would limit the extension of the realization advantage and achieving 5% EBIT margin guideline would be a daunting task.

Returning home, Tata Motors reported an improvement in market share in the passenger car (PV) segment. In addition, improving freight demand and high truck fleet utilization are beneficial for commercial vehicles (CVs). The PV installations are running at full capacity and it is the bottleneck in the factories to increase the capacity by 10-15%. PV revenues reached almost half of

although the volume was only a quarter in the June quarter.

The company’s total net auto debt rose to Rs 60,700 crore at the end of June 2022 from Rs 48,700 crore a quarter ago. The company attributed the increase to unfavorable working capital cycles. While analysts expect net auto debt of Rs 25,000-30,000 crore by the end of FY24, the company plans to be net debt free by then.

The stock has been in a tight range for the past three months. The JLR’s volume increase in the close team and the degree of deleveraging would be major triggers for the stock in the medium term.

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