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Tata Motors’ JLR on strong footing but PV demand may lose steam


Tata Motors Ltd’s passenger vehicle (PV) business has seen a strong run so far in FY23. For perspective, PV sales volumes in the eleven months through February surged by nearly 51% year-on-year.

But the business could lose steam hereon. The vertical is likely to be adversely impacted as the company sees pent-up demand waning. The management was hosted at Nomura’s virtual India Corporate Day event where Tata Motors highlighted that there has been stress on demand and inventories have started to build at the dealers’ end. The moderation in demand is expected to play out for the overall PV industry as well in FY24.

In this backdrop, improving operating environment at Tata Motors’ UK-based subsidiary, Jaguar Land Rover Automotive Plc (JLR), augurs well. Here, the management noted that it didn’t see a tangible impact on order book from the high interest rate environment, but is seeing some churn at lower-end models.

Further, problems on supply chain constraints have bottomed out. Recall that the chip crisis was one factor that weighed on JLR’s performance in the half-year ended September, hurting investor sentiments.

Shares of Tata Motors have fallen by 2% in the past one year, underperforming the Nifty Auto index, which gained by nearly 19%.

But the chip shortage scenario had improved in the December quarter (Q3FY23). To be sure, the significant turnaround in JLR’s performance last quarter is encouraging. JLR’s Ebit (earnings before interest and taxes) margin rose for the second consecutive quarter to 3.7% in Q3, and the company is confident of achieving the 10% mark by FY26, according to an interaction between the management and Motilal Oswal Financial Services analysts.

As such, consistent improvement in JLR’s performance is crucial to reduce Tata Motors’ elevated debt levels. As of December-end, net auto debt stood at 57,500 crore. Besides, better margin prospects in the PV and commercial vehicle segment on the back of alleviating cost pressures would aid in lowering debt levels.

Meanwhile, Tata Motors has another lever to trim debt. This is the monetization of its partial stake in subsidiary, Tata Technologies Ltd. The latter has filed a draft prospectus with the Securities Exchange Board of India for an initial public offering through an offer for sale.

While paring debt would help investors’ sentiment for the Tata Motors stock, there is a looming headwind in the form of a potential recession in Europe and the US. JLR has a significant presence here and adverse macro events are likely to hurt demand.

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