Turning the corner! Motilal Oswal sees 18% upside in Tata Motors on strong JLR recovery

Brokerage Motilal Oswal said Jaguar Land Rover (JLR) is turning the corner on the back of improving chip supplies globally and a very strong order book, which should bode very well for Tata Motors.

JLR's wholesale volumes of 80,000 in the third quarter were at the highest level since the first quarter of FY22 when the semiconductor shortages began.

JLR had earlier said it continues to see strong demand for its vehicles and that the Refocus transformation programme is on track to deliver a target of £1 billion-plus improvements in the year to help mitigate the impact of inflation.

Tata Motor's unit is confident that it will achieve a positive EBIT margin and free cash flow in Q4 FY23 and hit breakeven free cash flow and a positive EBIT margin for the full year.

The three most profitable models, the New Range Rover, New Range Rover Sport and Defender account for over 74% of the order book.

"Strong product cycle and production issues have led to a surge in order backlog for JLR in EU (including UK) and Rest of the World markets to 215k units (Dec-22). This would be supplemented by a substantially favourable mix in favour of its three most profitable products, as well as a favourable mix and operating leverage benefit," Motilal Oswal said.

A possible monetization of its stake in Tata Technologies is likely to add Rs 25-47 per share for Motors, the brokerage said, adding that a strong recovery in JLR, a sustained resurgence of the India business are the key catalysts for the stock over the next 12 months.

It maintained the "Buy" rating with a target price of Rs 540, which represents an upside of 18% from current levels.

Tata Motors posted a consolidated net profit of Rs 2,958 crore for the quarter ended December 2022, against a loss of Rs 1,516 crore a year ago.

The auto major's consolidated operating profit, calculated as earnings before interest, taxes, depreciation and amortization or EBITDA, rose 11% YoY to Rs 9,900 crore and the margin improved 90 basis points to 11.1%.

Meanwhile, JLR reported a strong 28% growth in revenue to 6.04 billion pound sterling, and EBIT margin expanded by a sharp 230 basis points YoY to 3.7%. EBITDA margin, however, dipped 10 bps to 11.9%.

Nomura has a Buy call on Tata Motors with a target price of Rs 508, which signals an upside potential of 14% from the current market prices. ICICI Direct upgraded Tata Motors' stock from hold to buy with a target price of Rs 530 post the Q3 results, which signals an upside potential of 19% from the current market prices.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)