SynopsisTata Motors plans to bring down its net debt to near zero by 2023-24, from around Rs 41,000 crore now. Retail demand also remains strong and this is resulting in accumulation of orders. These factors have made it a favourite of analysts.
Improving fundamentals helped Tata Motors post massive outperformance during 2020. However, Tata Motors is underperforming the market in 2021; mostly because the ongoing semi-conductor chip shortage is taking a big toll on its JLR production. For instance, JLR’s production for the first quarter of 2021-22 was down by around 30,000 units—around 27% lower than the normalized potential for the quarter—due to semiconductor supply constraints. Tata Motors expects the situation to worsen in the second quarter (JLR production may go down by 50%) and improve only from the third quarter of 2021-22. During these strenuous quarters, Tata Motors is also expected to report negative free cash flow (FCF) and loss at the earnings before interest and tax (Ebit) level.
However, analysts say that its current stock market underperformance provides a good entry point for long-term investors for various reasons. First, the present chip shortage is an industry-wide phenomenon. BMW and Daimler are also facing chip shortages and therefore, it is expected to end soon. To reduce the chip shortage impact on its margins, JLR is using the available chips on high margin products now. Second, the retail demand remains strong and this is resulting in an accumulation of orders. At present, it has retail pending orders for more than one lakh units, the highest in its history. Sales will bounce back once the chip shortage problem goes and that is why analysts are keeping the earnings for 2022-23 unchanged. Once the pandemic hit eases, there will be a major economic rebound and manufacturers of heavy vehicles like Tata Motors will be a major beneficiary of that cyclical recovery.
In addition to cyclical recovery, Tata Motors is also a very good long term bet. Tata Motors plans bring down its net debt to near zero by 2023-24, from around Rs 41,000 crore now. JLR’s financial improvements can be attributed to its strategy of shifting focus from volumes to profit and continued focus on cost savings. For instance, its breakeven point is now placed around 4 lakh units per annum compared to 6 lakh units in 2018-19. JLR is also leading the mega electrification change happening in the automobile industry. For instance, Jaguar is planning to make all vehicles electric by 2025.
- Buy: 20
- Sell: 5
- Hold: 7
Selection Methodology: We pick up the stock that has shown maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.
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