Tata Motors Still In Loss. Yet Favoured By Analysts?

The quarterly results of Tata Motors for Q1FY22 are out. The results aren’t that impressive, yet still better than the previous quarter. The company stares at a shortage of chips necessary to make cars. In addition, the COVID-19 imposed lockdowns have hugely impacted sales volume. The company’s cash cow, Jaguar-Land Rover’s (JLR) financial and operational performance seem dicey but are better than the last financial year.

According to a Bloomberg study, out of the 32 analysts tracking the Tata Motors stock, 20 have recommended a ‘BUY’ rating for it. The question is, despite being in Rs 4,450 crore loss in the first quarter of 2021, why are analysts recommending a ‘BUY’ for Tata Motors? Can the company come out of its losses in the near future? Does the company hold a hidden potential that general investors aren’t noticing? Let us dig deeper into the company.

How Has The Company Performed In Q1FY22?

• The Tata Motors Group’s business is broadly divided into two parts. Jaguar Land Rover (JLR) and Tata Motors Limited (TML). JLR has operations all over the world and mainly manufactures high-end cars. TML on the other hand manufactures cars, trucks, buses, and even has a vehicle financing business, mostly in India. 

• The total revenue of the group was up by ~105% YoY. As compared to the previous quarter, revenue went down by ~25%. Net loss decreased by 41.48% QoQ and by 47.25% YoY. 

• JLR’s performance accelerated this quarter. As compared to Q1 FY21, JLR’s UK sales (units sold) were up +187%, North America +51%, Europe +124%, China +14% and Overseas +71%. Overall retail sales of JLR were up 68% over one year.  The revenue for JLR was up 73.7% YoY, while its loss narrowed down by £303 million (~73%) over a year’s time. 

• Speaking of standalone results of TML. The company’s revenue increased by 343% YoY. The company’s pre-tax loss narrowed down to Rs 1,289 crore vs. a loss of Rs 2,141 crore in Q1 FY21. TML’s Electric Vehicle (EV) business delivered 5x revenue growth and the highest quarterly sales at 1,715 units.

Why Is Tata Motors Analysts’ Favourite?

Presently, Tata Motors faces three major challenges. Global semiconductor shortage, the impact of the COVID-19 pandemic, and debt management.

Every car requires a semiconductor chip for its vital functions. There is a global shortage and that has impacted the biggest players in the automotive industry throughout the globe. You can read more on the global semiconductor shortage over here. Moving forward, the global semiconductor shortage is likely to ease by year-end. Since this is a global crisis, major auto manufacturers are likely to invest in ramping up the supply of this chip. Tata Motors is handling the chip shortage in an efficient manner. It is using the existing stock to build vehicles that give higher profit margins. This way, Tata Motors can enhance profitability as well as cost-efficiency.

Coming to cost-cutting measures, JLR needs to sell a minimum number of cars every year in order to be profitable. This is because irrespective of the number of cars it produces, there are some ‘fixed’ costs attached to running a factory. In FY21, JLR reduced this ‘breakeven’, where it now only needs to sell 400,000 units to be profitable, instead of the earlier 600,000 units. 

While the supply chain for the production of vehicles remains slow, Tata Motors has retail pending orders for more than one lakh units. This is the highest the company has ever received. If things go around smoothly and India manages to curb COVID-19 and ramp up the vaccination drive, one can expect Tata Motors to start operating at maximum capacity, naturally adding to profit margins. The government has come out in support of the auto industry by notifying a Production Linked Incentive (PLI) scheme for the auto sector, especially in the EV segment. Besides, Tata Motors (Tata Electric) is the largest manufacturer of EVs in India. 

Tata Motors, including JLR, is a debt-laden company. The company has promised to be zero-debt by 2024. It had managed to reduce its debt quarter after quarter throughout FY2020, reducing debt by at least Rs 7500 crore. Tata Sons Chairman has recently reaffirmed its plans to go debt-free by 2024. 

Conclusion

Looking at the brokerage and analyst reports, we see one common thing. None of them are thinking short-term. Almost all brokerages seem to have a long-term approach to the company. Analysts are expecting the chip shortage to end soon. As it should, having eaten up 30% of JLR’s past projected sales. The world’s largest semiconductor chipmakers viz. TSMC (Taiwan), NXP (Europe), and Intel (US)  are ramping up production. We can expect an improvement in that area. 

Tata is taking stringent cost-cutting measures, as mentioned in the previous section. There has been a surge of orders for Tata Motors. In the domestic market, Tata Motors witnessed a 19% month-on-month growth. It sold 51,981 units of vehicles in July 2021 as compared to 27,024 units sold in July 2020. Its passenger vehicle sales witnessed a 25% month-on-month growth selling 30,185 units of passenger vehicles as compared to 24,110 units in June this year.

So if sales are growing, debt is going down, then what could stop Tata Motors from becoming profitable? In the short term, it could be the rapid growth of different mutated variants of the COVID-19 virus. Another lockdown could obstruct just about any other industry. As long as the COVID-19 virus remains under check, Tata Motors could practically achieve its goal of going debt-free by 2024 and possibly turn into a profitable company sooner.