CLSA upgrades Tata Motors to 'Buy' after JLR wholesales jump 15% YoY in Q3

Global brokerage CLSA, on Tuesday, upgraded Tata Motors' stock to 'Buy' on the back of its belief that recovery in Jaguar Land Rover’s sales volume, along with improvement in margin profile, will aid the company’s free cash flow in financial year 2023-24 (FY24).

It has set a target price of Rs 512 on the scrip, which implies 24 per cent upside from current levels. Shares of Tata Motors surged 7 per cent in Tuesday's intra-day trade before settling at Rs 413 apiece, up 6 per cent. Those of Tata Motors DVR closed 3.65 per cent higher.

In comparison, the benchmark S&P BSE Sensex fell 1 per cent, while the BSE Auto index edged 0.13 per cent higher.

CLSA's upgrade comes after Jaguar Land Rover (JLR) reported higher wholesale volumes in the October-December quarter of FY23 (Q3FY23) amid gradual improvement in chip supplies.

Wholesale volumes were 79,591 units in the period (excluding the Chery Jaguar Land Rover China joint venture), up 5.7 per cent compared to Q2FY23, and 15 per cent over Q3FY22 sales.

Retail sales, however, fell 3.7 per cent QoQ at 84,827 units in a seasonally strong quarter, which, analysts said, could be due to high interest rates across economies.

According to the company, retails were higher YoY in North America/UK/Overseas by 26 per cent/14 per cent/12 per cent, but declined 6 per cent/8.5 per cent in Europe/China.

"The company continues to see strong demand for its vehicles. As of Q3FY23, the total order book increased to 215,000 client orders, up around 10,000 orders from Q2FY23. Demand for the New Range Rover, New Range Rover Sport and Defender remained strong and represent 74 per cent of the order book," Tata Motors said in its statement.

ICICI Securities says improvement in wholesale dispatches is a positive development for the company as it comes during the quarter which saw chip supply constraints and Covid-led lockdowns in China.

The numbers were ahead of the brokerage’s estimate of 88,101 units. Hence, it expects the company to, now, report better operating performance in this earnings season.

"JLR is witnessing a cyclical recovery, supported by a favourable product mix. However, supply-side issues will defer the process. While there will be no near-term catalysts from the JLR business, the India business will see a continued recovery. The stock trades at 17.1x FY24E consolidated EPS and 3x P/B. We maintain our ‘Buy’ rating with a target of Rs 520," Motilal Oswal Financial Services said in its report.

Meanwhile, Tata Motors anticipates positive free cash flow (FCF) of over £400 million in the quarter on a preliminary basis. In December 2022, the company completed a renewal of its undrawn revolving credit facility with 23 banks at £1.45 billion, with the maturity date extended from March 2024 to April 2026.

This, analysts said, would be further aided by improved product mix as share of models with better profit margins increased to 65 per cent at the end of the quarter vs 45 per cent in H1FY23.

JPMorgan, which has ‘neutral’ rating on the stock and a target of Rs 400, said JLR needs to achieve a similar FCF in the January to March quarter to be able to achieve its full year guidance.

In the past six months, Tata Motors has underperformed the market by falling 6.4 per cent, as compared to the 10.3 per cent rally in the S&P BSE Sensex. Further, in the past one year, the stock has slipped 18 per cent, as against a marginal 0.4 per cent dip in the benchmark index. It had hit a 52-week high of Rs 528 on January 18, 2022.

Technical View

Bias: Negative

Target: Rs 375

Resistance: Rs 415; Rs 421

Support: Rs 398

Shares of Tata Motors had been trading below its 20-DMA (Daily Moving Average) since early December. The stock declined almost 11 per cent since then, till January 09.

However, today's sharp up move has seen the stock bounce back above the 20-DMA. It is, now, seen testing resistance at its 50-DMA of Rs 415, above which the next hurdle shall be Rs 421 - the 100-DMA.

Overall, the bias on the basis of price-to-moving averages remains negative as the shorter-term moving averages are hovering below the longer-term moving averages.

On the downside, the stock is likely to revisit the recent lows of Rs 375-odd level. In the interim, the 20-DMA at Rs 398 could provide good support.

(With inputs from Rex Cano)