Tata Motors had underperformed the market by falling 12 per cent from its recent high of Rs 200 on January 15, 2020, against 2 per cent decline in the Sensex.
The brokerage firm believes rising capex and falling profits phase—its Achilles’ heel—is reversing; and margin drivers are revving up—improving product mix, sustained cost reduction and focused capex spends; and cash and profitability will accelerate—robust free cash flow or FCF (16 per cent yield) and 16 per cent RoE (2 per cent in FY19) in FY22E.
While the full benefits of restructuring will be contingent on volume rebound, even modest volume growth will be enough to get Tata Motors' operating leverage engine, and stock, to fire. Global macro and technology misfires are risks; management’s tight seat belts on costs, capex and tech-invests should provide some safety.
“We are enthused by Tata Motors' muted volume growth assumption as a base for driving profitability and cash flow. Moreover, promoter’s sustained capital support indicates management’s long-term commitment to the business”, it said in the company update.
While Jaguar Land Rover’s (JLR) progress on cost cutting / margin delivery is delivering positive results, the market environment in terms of growth challenges, competitive intensity and weak pricing power (incentives + CO2 emission roll over) are unlikely to be supportive, analysts at JP Morgan said in an auto sector update.
The foreign brokerage firm believes that the easy catch-up trade from depressed valuations is largely over. We will closely monitor the acceleration in cost savings, sustainable recovery in China or a potential alliance to rationalise capex which could cause us to turn constructive on the stock.