China has again imposed strict lockdown measures across certain regions because of a rise in covid-19 cases. This adds to the woes of Tata Motors Ltd, which is already facing a risk from the ongoing Russia-Ukraine conflict because of its exposure to Europe through Jaguar Land Rover (JLR).
The regional lockdowns may have an adverse impact on operations of the JLR joint venture in China. These events come at a time the auto sector is already battling severe cost inflation. Unsurprisingly, the shares of Tata Motors have lost some steam, declining by 14% so far in 2022, though from a medium-term perspective investors are still sitting on handsome gains.
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Investors tend to get jittery when there is a potential threat from global events such as the Russia-Ukraine war. “With Tata Motors operating in multiple regions, there is a risk to revenue and supply chains. Further, the inability to gauge the impact from the crisis casts a shadow on the predictability of the JLR business. Domestic automakers are better positioned as there is a possible risk only to supply chains," said Vivek Kumar, automobile research analyst, JM Financial Institutional Securities. For perspective, shares of Maruti Suzuki India have been flattish so far in 2022.
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This means a recovery in JLR volumes could be further delayed. Kotak Institutional Equities expects JLR UK volumes to rise by 15-16% year-on-year (y-o-y) in FY23E compared with an earlier estimate of 34% y-o-y.
Even so, in the JLR business, there is a higher pricing power and ability to pass on the commodity pressures as it operates in the luxury segment, said Kumar Rakesh, a senior automobile and technology analyst at BNP Paribas India. Demand in the JLR business was strong at the end of the December quarter, with a record order booking of 155,000 units.
A sharp rise in key raw materials such as steel and aluminium also pose hurdles, prolonging margin recovery. Further, raging crude prices impact affordability. A potential increase in diesel prices would impact the profitability of fleet operators in the commercial vehicle (CV) segment if they are unable to fully pass on the burden to end consumers.
However, demand is recovering in the CV industry. In February, Tata Motors clocked 11% y-o-y growth in CV volumes.
“We expect the CV industry to see a strong cyclical upturn, as the last downcycle was the sharpest in the last 20 years. Also, with green shoots in the economy and further structural tailwinds in the form of increased infrastructure spend and the production-linked incentive scheme of the government, CV volumes are likely to expand," Rakesh said.
Tata Motors is also on a strong footing in the domestic passenger vehicle (PV) segment, where it has seen market share gains. However, that hardly offsets the worries.
Kotak’s analysts remain conservative. “We have cut our FY2023-24E consolidated Ebitda estimates by 7-25% led by lower volume assumptions for domestic CV and JLR businesses and cut 60-240 basis points in Ebitda margin assumptions," they said. One basis point is 0.01%. Ebitda is earnings before interest, taxes, depreciation, and amortization.
Meanwhile, amid rising oil prices, there could be an accelerated conversion to electric vehicles (EVs). Tata Motors leads in EV market share and could benefit from it. In fact, this has been a key factor that boosted sentiments for the stock last year. In 2021, the stock appreciated as much as 162%, notably surpassing the Nifty Auto index, which gained 19% in the same period. On the flip side, given the looming concerns and a sharp outperformance, meaningful upsides may be capped.
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Europe exposure a risk for Tata Motors - Mint
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