Tata Motors’ shares ride high on Q4 margin surprise

The automaker reported Q4 consolidated Ebitda (earnings before interest, tax, depreciation and amortization) margin of 11.1%, which is a drop of 325 basis points (bps) year-on-year (y-o-y). One basis point is 0.01%. However, this was ahead of analysts’ estimates. For instance, analysts at Motilal Oswal Financial Services were expecting the measure to stand at 10.6%.

Operating revenue fell by 11.5% to Rs78,439 crore. While revenue in the commercial vehicle (CV) and passenger vehicle (PV) business grew by 29% and 62%, respectively, Jaguar and Land Rover (JLR) business reported a decline in y-o-y revenue by 27%.

JLR business was impacted by semiconductor shortage leading to a fall in wholesale volumes (excluding joint venture) by 38% y-o-y in Q4. But the management expects the chip situation to gradually improve going ahead and volumes in FY23 to surpass FY22, it said in the post earnings call.

However, Q1FY23 is likely to be impacted owing to the lockdown in China and changeover in the model. Concerns with respect to elevated commodity costs are likely to sustain. But subsequent quarters are expected to recover and the management foresees achieving Ebit margin of 5% and more than GBP1 billion free cash flows.

JLR’s order book stands at 168,000 units at the end of Q4 which is an increase from 155000 units in Q3FY22. Owing to this coupled with low channel inventory in system, analysts at ICICI Securities expect mix to normalize resulting in mean reversion of realization and gross margin as production improves.

In the Indian business, the CV segment would benefit from further growth with increased infrastructure activity. The management said in the call that the increase in fuel prices did not impact demand as is evident from the good traction in May so far. The outlook for PV business is likely to remain strong and hence the company is boosting capital expenditure in the segment. Note that in FY22, PV volumes increased by 67% y-o-y and the market share improved to 12.1% from 8.2% in FY21.

“As CV cycle turns (expect ~21% CAGR for industry over FY22-FY25E), Tata Motors (being the market leader in domestic CVs) is likely to benefit with improved margins,” said ICICI Securities analysts in a report on 13 May. CAGR is compound annual growth rate. It also leads in electrification in the PV business with the highest market share.

Even so, there are headwinds. “We cut our FY23/FY24 consolidated earnings per share estimate by 12% each to account for: a) a volume cut in JLR due to the lockdown in China and slower improvement in semiconductor supplies, b) cost inflation, and c) translation impact of the appreciation in the INR against the GBP on JLR consolidation,” said analysts at Motilal Oswal Financial Services in a report on 13 May.