Is Tata Motors on the cusp of a turnaround?

Operations were badly hit by the pandemic and the war in Ukraine. Demand evaporated amid covid, facilities were shut down, and every auto company struggled to get hold of semiconductors. Though the pandemic eased in 2022, these chip shortages continued. Then, the war in Ukraine hit demand in the EU, and lockdowns in China caused issues in one of JLR’s biggest markets and in its manufacturing facilities.

However, financial data from the first three quarters of FY23 (April-Dec 2022) indicates a likely turnaround and sales data from Q4 (Jan-Mar 2023) suggests this turnaround is accelerating.

In the first nine months of FY23, the company declared consolidated revenues of ₹2.43 trillion, an increase of 20% from ₹2.02 trillion in Apr-Dec 2021. Net losses for the first nine months of FY23 amounted to ₹2806 crore. While that’s a massive amount, it’s a lot less than the losses of ₹10, 317 crore in the same period of FY21.

Moreover, in Q3 FY23 (Oct-Dec 22), Tata Motors declared consolidated profits of ₹3043 crore versus losses of ₹898 crore in Q3 FY22. Both Tata Motors and JLR declared profits along with strong revenue expansion. The profits and revenue growth were spread across segments and regions, with Tata Motors’s passenger vehicles and commercial vehicles divisions and JLR divisions declaring revenue expansions and net profits in Q3.

The sales data from Q4 is encouraging, too. JLR reported wholesales (vehicles sent out to dealers) were at 94,649 units in Q4, up 24% from Q4 FY22. For the full FY23, JLR sold 321,362 units, up 9% from a year ago (the wholesales exclude the China JV).

Retail sales in Q4 FY23 (vehicles sold by dealers) came in at 102,889, up 30% from Q4 FY22. This is higher than wholesales, indicating that prior inventory was mopped up. In FY23, JLR sold 354,662 retail units, or 6% fewer than in FY22. The order book for JLR is around 200,000 units, including bookings for Range Rover, Range Rover Sport and Defender. That’s about seven months of (nearly) guaranteed sales in FY24. JLR expects free cash flow of over £500 million for FY23.

Tata Motors’s commercial vehicle domestic sales in Q4 FY23 came in at 1,12,145 units. That’s 22% higher than in Q3 FY23 and 2% higher than in Q4 FY22. The company says there was “robust demand for heavy trucks… but demand for small and light commercial vehicles continued to be impacted due to high interest rates”. Overall, Tata Motors’s domestic commercial vehicles business grew 22% from FY22 to FY23. Thanks to new emission norms, high replacement demand is likely to continue.

On passenger vehicles, Tata Motors posted its highest-ever annual domestic sales of 5,38,640 units, representing about 46% growth over FY22. Four SUVs – Nexon, Punch, Harrier and Safari – contributed two-thirds of volume. Tata Motors also sold 50,000 EVs in FY23, registering 154% growth over FY22. EV penetration increased from 7% of total sales in Q1 FY23 to 12% in Q4 FY23.

Uncertainties remain, however. Covid is rearing its ugly head again and the war in Ukraine continues. However, the chip shortage has eased considerably and the volume recovery and order book indicates the business is now on a better footing.

Brokerages and financial institutions have upgraded the business, with consensus “buy” recommendations amid strong profit projections and price targets. FY23 is expected to see a turnaround with a small net profit of ₹1,100-1,150 crore versus a loss of ₹11,235 crore in FY22. FY24 is expected to see net profit expand to well above ₹10,000 crore.

The stock has risen to ₹459, up 8.5% over the past month. Goldman Sachs has upgraded its price target from ₹480 to ₹550 on the basis of JLR’s data. Nomura India has a target of ₹508, CLSA assesses it at ₹544, and other brokerages have price targets in the range of ₹475 to ₹525.

One note of caution, though. It’s still early days. The JLR numbers are from dealers and the cycle may not have fully turned around. But the Tata Motors stock rally does appear sustainable.