CLSA upgrades Tata Motors to Buy

The year 2022 has not been a great year for Tata Motors with the stock losing 18-20% during the year. Apart from weak global demand for JLR products, the company was also hit by the chip shortage. Now things appear to be changing. The global demand is picking up, China is reopening its economy once again and the chip supply situation is normalizing. In this context, with the improved quality of sales by Jaguar Land Rover (JLR), global broking major CLSA has upgraded Tata Motors to “Buy” with a 24% upside target on the stock. Apart from recovery in the sales of Jaguar Land Rover, CLSA also expects an improvement in the margin profile of the company. This is likely to boost free cash flows (FCF) in FY24.

The closing price of Tata Motors on Wednesday 11th January 2022 was Rs418 and the target set by CLSA for the stock is Rs512, which now implies an upside of 22.5%, which his still fairly healthy. When the call was given, the stock had 24% headroom to go up. However, post this upgrade, both Tata Motors and Tata Motors DVR have seen their stock price go up. Tata DVR represents the differential voting rights (DVR) shares of Tata Motors, which gets a higher dividend that Tata Motors but does not have voting rights. Both the stock and the DVR have been rallying over the last few days, even ahead of this upgrade by CLSA.

The principal driver for the CLSA upgrade came after Jaguar Land Rover (JLR) reported higher wholesale volumes in the quarter between October 2022 and December 2022, also known as Q3FY23. The bounce came on the back of robust improvement in chip supplies, which had been a major stumbling block for auto companies in the past few months. For the quarter, the wholesale volumes were 79,591 units. However, this figure excludes the Chery Jaguar Land Rover China joint venture. One of the positive factors for JLR is that the China numbers have been picking up and are expected to go up further as the country opens up from its rigidly zero-COVID policy.

As much as the wholesales were attractive, the same cannot be said about retail sales, which fell 3.7% on QOQ basis at 84,827 units. This could be largely attributed to the prevalence of high interest rates across economies. Most of the retail customers tend to be extremely sensitive to rates and any sharp spike in rates can seriously dent demand. Retail sales had grown by 26% in North America, 14% in UK and 12% in overseas markets. However, European region saw 6% fall in sales while China witnessed 8.5% fall in sales of retail sales in the quarter. Eventually, it was pressure from Europe and China that kept the retail sales under pressure.

However, order books continue to be very strong. For Q3FY23, total order book increased to 215,000 client orders. There was robust demand for the New Range Rover, the New Range Rover Sport and the Defender; with these 3 models representing roughly three-fourths of the overall book. Brokerages are of the view that robust wholesales growth amidst chip constraints, weak demand and COVID lockdowns in China, is a good signal. In fact, the big positive was that the wholesale numbers for JLR overall were much ahead even of the most optimistic expectations on the street and that has stood them in good stead.

Most analysts also expected that the growth in the coming quarters for TAMO and JLR should be driven by improved product mix as the company gravitates its production share more towards the models with better profit margins. In fact, the share of high margin models has increased from 45% to 65% on quarter on quarter basis.  That is a signal that the stock would gradually show more profits, better margins and all this adds up to the rather reasonable valuations that the stock is currently available at. The stock has also fallen 6.5% in the last 6 months, underperforming the Nifty which rallied by 10.4% in the same period. Clearly, there is a lot of catching up for Tata Motors and the data is just looking suitable.

SUMMARY
Tata Motors has been upgraded by CLSA with an upside target of 24% from current market levels. The upgrade to BUY has been driven by expectations of improved sales, recovery in China and greater focus on high margin products.