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Tata Motors (Photo: Twitter)
The brokerage expects further downside risk from margin slippage at Jaguar Land Rover (JLR) and within Indian passenger vehicles (PVs), especially the electric vehicle (EV) arm, on any significant shortfall in performance due to high valuations.
With today’s correction, the stock of the automobile company has plunged 16 per cent from its record high level of Rs 1,179.05 on July 30, 2024.
Tata Motors manufactures and sells commercial vehicles, utility vehicles and passenger cars in India. FY24 consolidated sales were mixed with JLR accounting for around 69 per cent, while India CV & PV combined around 30 per cent.
According to analysts at UBS, key downside risks for Tata Motors include a sharp appreciation of the British pound versus the US$/Rmb; a sharp slowdown or decline in China’s sales of JLR for regulatory or economic reasons; and an inability to refinance debt and turn around the India business.
A sharper recovery in global premium markets; JLR’s outperformance in China; strong cost controls driving a margin beat for JLR; a stronger and quicker recovery in freight demand driving higher truck sales and the emergence of a global partner for the India PV business are key upside risks, the brokerage said.
Meanwhile, last month, the global rating agencies Moody’s Ratings and S&P Global Ratings had upgraded Tata Motors’ rating. Tata Motors’ two-notch rating upgrade with a positive outlook follows the company’s sustained track record in achieving revenue growth, improving profitability and reducing debt using its large free cash flow despite its elevated capital expenditure to refresh its products, Moody’s Ratings said.
S&P Global Ratings expect Tata Motors’ debt to continue to decline steadily, supporting the upgrade. “In our base case, we estimate Tata Motors will generate free operating cash flow of about Rs 17,500 crore annually over fiscal 2025 and 2026 (year ending March 31). This should reduce the company’s adjusted debt to zero by March 2026 from about Rs 35,000 crore as of March 2024,” S&P Global Ratings had said.
“Our debt calculations include adjustments for Tata Motors’ trade acceptances and securitization at JLR, which totaled about Rs 12,000 crore as of March 2024. Tata Motors intends to operate as a net-zero auto debt company,” the rating agency added.
A slowdown in the global automobile market, renewed supply chain issues such as with aluminium that JLR currently faces, and potential missteps in JLR’s electrification strategy are key risks to Tata Motors’ deleveraging.
However, given the extent of debt reduction that the company has executed, S&P Global Ratings view these risks as manageable and unlikely to weaken the company’s ‘bb’ SACP.
First Published: Sep 11 2024 | 10:14 AM IST
