Tata Motors’ shares ride high on Q4 margin surprise

Shares in Tata Motors Ltd rose more than 9% in Friday morning trading on the NSE. This comes on the back of better-than-expected margin development in the result for the fourth quarter (Q4FY22).

The carmaker reported a consolidated Ebitda margin for the fourth quarter (profit before interest, tax, depreciation and amortization) of 11.1%, which is a decrease of 325 basis points (bps) from year to year. A base point is 0.01%. However, this was before analysts’ estimates. For example, analysts at Motilal Oswal Financial Services expected the measure to stand at 10.6%.

Operating income decreased by 11.5% to Rs 78,439 million. While revenues for commercial vehicles (CV) and passenger vehicles (PV) grew by 29% and 62% respectively, Jaguar and Land Rover (JLR) reported a 27% year-over-year decline in revenue.

The JLR business was affected by a semiconductor shortage, which led to a reduction in wholesale volumes (excluding joint ventures) by 38% compared with the same quarter last year during the fourth quarter. But the management expects that the chip situation will gradually improve in the future and that the volumes during FY23 will exceed FY22, it was stated in the call.

But Q1FY23 is likely to be affected by the shutdown in China and the transition to the model. Concerns about increased raw material costs are likely to persist. However, the following quarters are expected to recover and management expects to achieve an Ebit margin of 5% and more than GBP 1 billion in free cash flow.

JLR’s order book amounts to 168,000 units at the end of Q4, which is an increase from 155,000 units during Q3FY22. Because of this, combined with low channel inventory in the system, analysts at ICICI Securities expect the mix to normalize, resulting in average return on 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 conversation that the increase in fuel prices did not affect demand, which is evident from the good pull in May so far. The outlook for the PV business is likely to remain strong and therefore the company is increasing its investments in the segment. Note that during FY22, solar cell volumes increased by 67% on an annual basis and the market share improved to 12.1% from 8.2% during FY21.

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

Despite this, there is a headwind. “We reduced our consolidated earnings per share for FY23 / FY24 by 12% each to take into account: a) a volume decrease in JLR due to the shutdown in China and slower improvement in the semiconductor supply, b) cost inflation and c) translation effect of the appreciation of INR to GBP on JLR Consolidation, “said Motilal Oswal Financial Services analysts in a May 13 report.

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