Improving business outlook propels Tata Motors stock to 27-month high

Strengthening global demand is likely to be supplemented by improving domestic outlook for the company’s core CV segment, where Tata Motors is the leader
Shares of Tata Motors, which surged 8 per cent on Tuesday, and have gained more than 30 per cent in the past eight trading sessions, are now at a 27-month high.

A sequential improvement in Jaguar Land Rover (JLR) sales across key markets like China, revival in domestic commercial vehicle business, and steady growth in India’s passenger car sales, coupled with the management’s focus on free cash flow generation and balance sheet deleveraging, have lifted investor sentiment.

JLR, on Monday evening, released its 2020 sales figures, which indicate strong demand in China (about 20 per cent of overall volumes) as well as signs of continued recovery in most other regions on a sequential basis.

“Retail sales for the quarter ended December 2020 were 128,469 vehicles, 13.1 per cent higher than the 113,569 vehicles sold in the preceding quarter, but down 9 per cent in the same period last year,” said JLR in a statement.

The management said JLR’s performance in China — the region least impacted by the Covid-19 pandemic in the most recent quarter — has been particularly encouraging, with sales there growing 20.2 per cent sequentially and 19.1 per cent year-on-year (YoY).

Retail sales in other markets also continued to recover and were up significantly over the previous quarter in North America (up 31.7 per cent), rest of the world (up 26.6 per cent), and Europe (up 20.5 per cent). However, in these markets, retail sales were still 9–20 per cent lower on a YoY basis and remained below pre-Covid-19 levels.

Strengthening global demand is likely to be supplemented by improving domestic outlook for the company’s core commercial vehicle segment, where Tata Motors is the leader.

Commercial vehicle sales have witnessed one of the worst-ever slowdowns in the past two decades, given the introduction of revised axle norms in 2018 and sluggish economic growth hurting overall industry volumes. The outbreak of the novel coronavirus and the subsequent lockdown in the first half of the ongoing financial year only made matters worse.

However, a revival in the sales of light commercial vehicles and pick-up in construction activity after the easing of lockdown curbs, is seen aiding the cyclical recovery in commercial vehicle sales, said analysts.

“Commercial vehicles could benefit from a long overdue replacement cycle, higher industrial output, and gradual resurgence in infrastructure spending. After an anticipated fall of 11 per cent in 2020-21 (FY21), we expect volumes to witness 18 per cent compound annual growth rate between FY21 and 2022-23 (FY23),” said brokerage firm Emkay in a recent report.

If the scrappage policy is introduced, it could accelerate sales further for the industry, including Tata Motors.

The company has also revamped its strategy in the passenger vehicle (PV) segment, with the loss-making unit turning earnings before interest, tax, depreciation, and amortisation (Ebitda)-positive in the September 2020 quarter, aided by higher volumes and market-share gains.

Analysts remain confident of a sustained growth in PV volumes, driven by the company’s focus on new launches in the high-growth sport utility vehicle (SUV) segment, such as compact/mid-sized SUVs, improving dealer profitability, and aggressive marketing initiatives.

“In PVs, the Harrier, Altroz, and the Nexon are gaining strong traction. A majority of the dealers have turned profitable and the company has focused on retail sales, rural penetration, and 20 key urban micro-markets to drive demand,” said Kapil Singh, research analyst at Nomura, in a recent note.

A key overhang for the stock in recent years has been growth slowdown and high debt. As volumes are seen recovering, aided by an improving demand outlook, the focus now shifts to free cash flow generation and balance sheet deleveraging, say analysts.

Free cash flow indicates the surplus left after accounting for operating expenses (excluding interest costs) and capital expenditure needs of a company.

CLSA forecasts free cash flow of £2 billion for JLR and Rs 4,700 crore in India operations during FY21-23, which should help pare its consolidated net debt from Rs 48,700 crore in 2019-20, or FY20 (net debt/Ebitda of 2x) to Rs 33,300 crore by FY23 (0.7x).

Tata Motors earned over 30 per cent of its revenues from Europe and the UK as of FY20, according to Bloomberg data. While the Brexit deal is a positive, any potential disruption in volumes due to the second wave of Covid cannot be ruled out and may be viewed negative. Further, the success of new launches and currency/commodity prices are other key monitorables for the stock.

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