Motilal Oswal has maintained a 'buy' rating on Tata Motors shares with a target price of ₹540, implying a 31 per cent upside potential for the stock from its current levels
Tata Motors-owned Jaguar Land Rover (JLR) is turning the corner and would be the key driver of the stock, said domestic brokerage house Motilal Oswal Securities in a research note. The brokerage also said that the monetization of stake in Tata Technologies – possible value of ₹25-47 per share for Tata Motors – could also act as a catalyst for the stock.
Motilal Oswal has maintained a 'buy' rating on the stock with a target price of ₹540, implying a 31 per cent upside potential for the stock from its current levels.
On Thursday, shares of Tata Motors are trading 0.28 per cent higher at ₹412.50 apiece on the NSE. The stock is down by about 17% from its 52-week high of ₹494.50, hit on 17 August, 2022.
This stock has risen 4.48 per cent in 2023 so far. During the last six months, the stock has lost 4.51 per cent on NSE. Market cap of the firm stood at ₹1.48 lakh crore.
For JLR, supplies are gradually improving and demand is healthy. As supplies improve, JLR should reach near the zero net debt level by FY25, aided by improved production, better margins and working capital release, the domestic brokerage firm stated.
"JLR will structurally continue its journey from being a premium brand to a premium luxury brand by focusing on its brand pull strategy and redefining Jaguar with premium positioning in the era of EVs with new launches starting from CY25," Motilal Oswal Securities said.
The brokerage said that the management is prioritizing JLR's revenue over volume to gauge progress; revenue is only 15 per cent below the FY18 peak even as volumes are down 43 per cent. "It will continue to focus on profitable growth and does not just want to be a niche player," the note said.
The management is confident of achieving 10 per cent EBIT margin for JLR by FY26 (as against 3.7 per cent in 3QFY23), driven by the normalization of many discontinuities like the premium cost of chips, vendor compensation for lower volumes, commodity/energy costs; richer mix; favourable FX; and operating leverage.
This, the note said, is after factoring in some dilution in the mix as well as an increase in VME.
Apart from this, the brokerage believes working capital release (negative working capital business) and controlled capex should help JLR inch closer to the zero net debt level by FY25E (as against EUR 3.85 billion in December 2022), which is delayed by a few quarters as against earlier guidance of FY24.
Tata Motors should witness a gradual recovery as supply-side issues ease (for JLR) and commodity headwinds stabilise (for the India business).
It is seen benefitting from a macro recovery in India, company-specific volume/margin drivers, and a sharp improvement in FCF and leverage in JLR as well as the India business.
The stock trades at 15.2 times FY24E and 12.3 times FY25E consolidated P/E and 3.8 times FY24E and 3.2 times FY25E EV/Ebitda.
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