Tata Motors’ European exposure hurts investor sentiment

Shares of Tata Motors Ltd have lost some steam in 2022, falling around 13% so far in the year, even as, from a medium-term perspective, investors are sitting on some nice gains.

The automotive sector is expected to bear the brunt of elevated input cost pressures. The Russian-Ukrainian conflict has led to a sharp rise in the prices of key raw materials such as steel, aluminum. Particularly for Tata Motors, its exposure to Europe through Jaguar Land Rover (JLR) has recently shaken investor sentiment. The company has suppliers in Ukraine and the current crisis could pose production issues that would cause a delay in the resumption of JLR’s volumes, analysts at Kotak Institutional Equities noted in a March 11 report. In this context, volume expectations have been revised downwards. Kotak analysts now expect JLR’s UK volumes to grow 15-16% year-on-year (yoy) in FY23E, down from an earlier estimate of 34% year-on-year.

Note that in the nine months ended December (9MFY22), JLR contributed 70% of consolidated revenue from Tata Motors operations. In the December quarter (Q3FY22), wholesale volumes, excluding joint ventures, fell 33% year-on-year, limited by the shortage of semiconductors. However, demand remained strong with a record order book of 155,000 units.

Going forward, rising metal prices are not the only concern. Rising oil prices are impacting affordability, especially in the commercial vehicle (CV) segment. Higher diesel prices would impact the profitability of fleet operators if they are unable to fully pass on the load to end consumers.

As JLR and the domestic CV business face headwinds in the form of supply issues and cost pressures, Kotak analysts have lowered estimates. “We have reduced our consolidated EBITDA estimates for FY 2023-24E by 7-25%, due to (1) lower volume assumptions for the domestic CV and JLR businesses and (2) a reduction of 60 to 240 basis points in EBITDA margin assumptions We have slightly reduced our estimates for the domestic PV business given that 45% of the domestic PV portfolio comes from the SUV segment, where the impact on the demand may be limited.” Ebitda is earnings before interest, taxes, depreciation and amortization. One basis point equals 0.01%.

What offers some comfort is that Tata Motors is on a solid footing in the domestic passenger vehicle (PV) segment where the automaker has seen its market share increase. For example, in the third quarter, the market share increased from 10% in the first quarter to 13%. The double-digit market share comes after a long nine-year period.

Meanwhile, amid rising oil prices, there could be an accelerated conversion to electric vehicles (EVs). Tata Motors has the leading electric vehicle market share and could benefit from it. In fact, that was a key factor in boosting sentiment for the title last year. The stock has generated outstanding returns in 2021, appreciating up to 162%, outperforming the Nifty Auto Index by a mile, which has gained 19% over the same period.



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Mary I. Bruner