The Tata Motors stock gained about 17 per cent on Tuesday on the back of brokerage upgrades owing to a better-than-expected September quarter performance at its British unit, Jaguar Land Rover (JLR).
Plans to reduce debt and rack up gains through cost cutting also perked up the Tata Motors stock.
The stock has, over the last two trading sessions, gained 36 per cent. While analysts have pointed out multiple triggers for this, what has led to the upgrades is the operational turnaround at JLR.
Volumes for the maker of JLR cars are showing signs of bottoming out after five quarters of muted growth, especially in key markets.
Volumes at the unit in China improved by 24 per cent year-on-year. JLR reported an overall volume growth rate of 3 per cent.
Analysts at Motilal Oswal Financial Services (MOFSL) say JLR is likely to improve on volumes and realisations, because three key models have transited to a new model year: The Evoque (August 2019), Jaguar XE (December 2019), and the Discovery Sport.
While analysts expect volume growth in 2019-20 (FY20) to be flat, they expect it to be at 4 per cent each in the next two years. This will be led by a recovery in markets
such as China and plans to launch 16 models/variants, including two new ones.
Analysts at CLSA have highlighted the improvement in margins, which have started recovering after four consecutive quarters of contraction.
JLR reported a 66 per cent jump in operating profit for the quarter, on account of a product mix (higher sales of Range Rover vehicles), better-than-expected gross margins, and lower other expenses.
Margins were up 470 basis points to 13.8 per cent, the highest in four years. What aided profitability were also savings in cost due to the ongoing Project Charge programme and a favourable forex movement.
With operations in China stabilising and further cost-control benefits taking effect, the management has reiterated its earnings before interest and tax (Ebit) margin guidance for FY20 at 3-4 per cent. Analysts at MOFSL say the company has several levers, cyclical and structural, including operating leverage, cost savings on the modular platform, and the low-cost Slovaka plant, which will drive a recovery in the Ebit margin and leave scope for positive surprises on profitability.
The Rs 6,500-crore equity capital infusion by promoter Tata Sons through a preferential allotment is another positive because it will be used to retire auto debt, pegged at Rs 50,000 crore. Promoter shareholding and voting rights are expected to move up by 8 percentage points after the infusion. Credit Suisse says the preferential allotment is positive because it reduces group debt, shores up cash flow, and reinforces confidence in the promoter backing for the company.
While the Street is positive on the company and has sharply upgraded the target prices, investors should be mindful of the risks. A demand slump in domestic operations meant that the standalone operations reported a loss in operating profit. Analysts expect standalone margins to remain under pressure due to weakness in demand, lack of clarity around pre-buying, and higher discounting trends in the commercial vehicle segment. Uncertainties around Brexit, technology changes, and global auto demand could push back the nascent recovery at JLR.
The China JV, which accounts for over half the the volumes in China, continues to lag and this has to improve for an uptick in margins. Investors should await a sustained demand and margin trend both at JLR and standalone level before considering the stock.