Tata Motors needs JLR on cruise control now

JLR’s solid Q3 meant Tata Motors’ consolidated earnings before interest, tax, depreciation and amortization (Ebitda) came in at ₹9,643 crore, a seven-quarter high. The company swung to a net profit in Q3 after reporting loss for the past many quarters. Still, this may not offer a big respite on profitability for the full year (FY23) given the net loss of ₹5,951 crore in H1FY23. Analysts at Jefferies India now expect a lower net loss in FY23 and have raised FY24-25E earnings per share by a slight 3-5%.

Coming to Q3, JLR’s performance was driven by easing semiconductor shortage, improving volumes, favourable mix and better pricing. The average weekly production of Range Rover and Range Rover Sport, which are high-margin products, was higher by nearly 44% sequentially. This meant JLR’s total volumes, excluding the joint venture with China, rose by almost 6% sequentially. The Q3 Ebitda margin was up by 160 basis points to 11.9%. One basis point is 0.01%.

The robust order book offers good revenue visibility. JLR’s order book stood at 215,000 units at the end of Q3 with 74% of bookings skewed towards Range Rover, Range Rover Sport and Defender. However, JLR has maintained the FY23 guidance given the gradual improvement in semiconductor shortage. It aims to clock wholesales volume of 310,000 units and expects positive Ebit margin in FY23.

Meanwhile, demand for the domestic business continues to remain healthy across Tata Motors’ commercial vehicles (CV) and passenger vehicles (PV). Q3 saw a sequential margin expansion in both segments and the trend is expected to continue with softening input costs. But with increasing competitive intensity, trends in market share need to be watched. Tata Motors’ CV market share is declining. In the nine-month period ended December, the measure was 42% versus 44.7% as at FY22, according to the company’s presentation.

The enquiry to retail time in the PV business has increased, noted the management in the earnings call, although it does not see an impact on demand. The electric vehicle (EV) business continues to grow and formed almost 10% of PV volumes in Q3. It began deliveries of its latest offering Tiago EV this month and the order book is robust.

While all segments are on a strong footing, high debt levels are a cause of concern. It is comforting that net auto debt is trending down every quarter but the company has a long way to go before it becomes debt-free, which it aims to do by FY24.

“India (CV and PV) and JLR have tailwinds of cyclical recovery and product-cycle. This should aid balance sheet improvement,” said analysts at Nuvama Research in a report on 25 January.

Apart from reducing debt levels, sustaining the upbeat momentum in JLR is crucial to keep investor sentiments intact. JLR’s strong Q3 show should come as a relief as its muted performance has been a sore point for some time now.

Tata Motors’ shares are now down by about 19% from their 52-week high of ₹520 seen in January 2022.