SynopsisTata Motors hasn’t exactly met Street expectations in the second quarter, but a gradual improvement in chip shortage at its UK subsidiary in the second half of FY22 and sustained improvement at home should maintain stock buoyancy.
ET Intelligence Group: Tata Motors hasn’t exactly met Street expectations in the second quarter, but a gradual improvement in chip shortage at its UK subsidiary in the second half of FY22 and sustained improvement at home should maintain stock buoyancy.
To be sure, the stock has risen 61% in the past three months.
Elevated structural costs and lower production volumes continued to weigh on the financial performance of JLR. Wholesale volumes of the maker of Range Rover and Discovery dropped 13% to 64,000 units owing to chip shortage. This is the second quarter in a row where daily production was curbed due to supply disruptions.
So, the operating profit margins (EBIT) of JLR slipped to negative 4.7% compared with 0.3% a year ago. But, what may excite investors is that even in difficult times, JLR continued to keep improving cost efficiency to mitigate waning operating leverage impact.
The biggest focus of JLR has been to continuously bring down break-even volumes. JLR’s quarterly break-even volume will be around 85,000 units in the second half of FY22, compared with 165,000 units in FY19. Furthermore, the trajectory of warranty costs has been trending down; it stood at 4% in Q2FY22 compared with 5.5% at the beginning of FY19. Even on capital expenditure, the spending remained calibrated.
So, it saved around 200 million in the first half of FY22 and JLR revised the investment target to 2.3-2.4 billion for the current fiscal. JLR aims to bring down the average material cost per car by around 1,000 in FY22.
This has been the prime reason the company guided for the positive EBIT margin forecast in the second half of FY22. The Street has baked in volume estimates of 328,000 and 425,000 units for FY22 and FY23, respectively. This implies that JLR needs a quarterly volume of 90,000 units in the remaining two quarters of the current fiscal.
The silver lining for JLR volumes has been a bulging order book of 125,000 units, of which about a quarter would be in the form of the newly launched Defender. This shows new volume intervention aids volume growth. JLR has recently launched a new Range Rover and sales are expected to start from Q4 of FY22.
Back home, the passenger car and trucks business are witnessing a sharp market share gain, thanks to encouraging response to new product launches at the passenger vehicle (PV) division and economic recovery for the commercial vehicle segment. PV market share rose to 11.3% in the second quarter, compared with 8.2% in FY21, and it had the highest wholesale volume in 33 quarters.
The electric vehicles (EV) segment, which has provided a major re-rating for the stock, accounts for 3% of the total volume and cumulative demand for the Nexon EV continues to outpace retails. On a sequential basis, the operating profit margin dropped to a negative 2.5% in the September quarter, a gain of 360 basis points on a quarter-on-quarter basis.
The truck business has recorded market share gains in all segments and the EBIT margin is just short of break-even level. With better control on costs, the Tata Motor CV segment is doing better on margin compared with its peers.
(Originally published on Nov 02, 2021, 06:33 AM IST)
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