Tata Motors stock rating ‘Buy’- Product mix, demand to help, say brokerages; check recos, share price targets

Tata Motors stock rating ‘Buy’: Product mix, demand to help, say brokerages; check recos, share price targets

Tata Motors share price was in the firm grip of bears today, with brokerages divided on the stock outlook after the company’s fiscal second quarter results. Tata Motors posted a net loss of Rs 945 crore for Q2FY23, narrowing from Rs 4,441.57 crore a year ago. The company’s EBITDA margin rose 130 bps on-year to 9.7% in Q2. Tata Motors share price fell 5% intraday today to Rs 409. The stock is down more than 16% year-to-date. ICICI Securities expects Tata Motors stock to gain up to 31%, cutting its previous estimate of 41%. Emkay and Motilal Oswal recommend adding Tata Motors, while HDFC Securities recommends reducing the stock.Stock Call: Tata Motor share price targets and brokerage calls (CMP: Rs 433)

ICICI Securities– Recommendation: BUY– Updated Target Price: Rs 571 (up 31%)– Previous Target Price: Rs 646

Motilal Oswal– Recommendation: BUY– Updated Target Price: Rs 500 (up 15%)– Previous Target Price: Rs 520

HDFC Securities– Recommendation: REDUCE– Target Price: Rs 415 (down 4%)

Better Mix Of Products

Tata Motors’ product mix will see significant improvement, as the new generation RR/RR Sport and Defender form over 70% of the current order book. Production of the RR/RR Sport has increased from 1,100 units per week in June to 2,200 units this quarter. ICICI Securities is positive about the new models, stating the EBITDA margin is up 400 bps quarter-on-quarter, at 10.3%, due to the better model mix amongst other factors.

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Chip Supply Improvement

Facing semiconductor chip supply issues due to global disturbances in the value chain, the volume for H1FY23 was 147k units, while the target for H2FY23 is set at approximately 160k units. Tata Motors has given guidance of a slower increase of volume in Q3, which Emkay states is due to continued chip shortages and supply constraints. “JLR continues to struggle with semiconductor shortages, which has been impacting its performance for the last five-to-six quarters,” says Motilal Oswal.

Demand In India

Emkay says, “We maintain our positive stance on expectations of a sales upcycle across segments,” but agree a key risk to the company could be “lower-than-expected growth in India CVs/PVs”. ICICI Securities states, “India business though impacted temporarily, is largely set to reach the targeted 10% EBITDA margin level in coming quarters with margin tailwinds coming in place.” The management states that the demand outlook is steady across CVs and PVs, even though the business margins in India for CVs and PVs faced pressure this quarter, due to high commodity prices and input costs.

Debt

As supply-side issues and headwinds are resolved, Tata Motors seeks to “reverse £2 billion of working capital-related increase in debt.” Tata Motors has not altered its target of being net debt free by FY24, though the management agreed it will be a daunting prospect from the current levels.

Concerns

HDFC Securities flags higher wages as a result of negotiations that will occur in Q3 as well as increased costs of engineering as Tata Motors seeks to improve its capabilities and equip itself for the future, amidst soaring energy costs. Emkay states that a key risk that could befall the company is any delay in ramping up production and the possible failure of the company’s new launches.