Sharekhan has put a Buy rating on Tata Motors with a revised price target of Rs 430, factoring in an improvement in operational performance across businesses, a positive outlook for JLR and domestic businesses, and robust FCF generation, leading to significant fall in debt. Tata Motors beat expectations in Q4FY21, which was driven by strong all round operational performance, with overall adjusted PAT growing 72.5% qoq, driven by 17% revenue growth and 11% EBITDA growth. Consolidated revenue grew by 41.8% yoy, driven by a 44% yoy in JLR volumes and a 90% growth in domestic volumes (of CVs and PVs).

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Tata Motors Consolidated EBITDA margin for Q4FY21 stood at 14.4%, expanding 1060 bps yoy, driven by a 1430 bps improvement in standalone business (commercial vehicles EBITDA at 9.1% and PV EBITDA at 4.9%) at 6.9% and a 910 bps improvement in JLR business at 15.3%. Tata Motors wrote off onetime exceptional charge of Rs 14994 cr for JLR’s reimagining strategy, as indicated earlier during the JLR Investor Day. Tata Motors generated robust free cash flows during FY21 and reduced its net auto debt significantly by Rs 7300 cr to Rs 40900 cr. Tata Motors deferred its plan of fundraising to another AGM.

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Sharekhan said that Tata Motors management has continued to meet its financial targets for JLR, improving revenues of >GBP 30 billion, EBIT margin of >10% and sustainable investments of GBP 3 billion by FY26, driven by its reimagine strategy. The company remains concerned about the near-term supply issues in India due to COVID wave-2 and chips shortage globally. However, the company expects the chips shortage situation to improve in H2FY22. In addition, the management remains positive on the domestic PV and CV businesses in the medium term, though the management highlighted the near-term challenges of COVID wave-2. 

Sharekhan said it continue to remain positive on Tata Motors’s operational performance and expect it to become earnings positive in FY2022E and 37.7% yoy in FY2023E, driven by 16.7% revenue CAGR during FY2021E-FY2023E and a 130 bps improvement in EBITDA margin to 13.5% in FY23E from 12.2% in FY21. Sharekhan has maintained a Buy rating on Tata Motors.

Tata Motors Key positives:

Strong improvement in consolidated EBITDA margin, in-line with the management commentary over past few quarters JLR’s Q4FY21 EBITDA margin stood at 15.3%, while that of CV and PV businesses stood at 9.1% and 4.9% respectively. Š
 Robust FCF generation in FY21 leading to a significant fall in net auto debt of Rs 7300 cr to Rs 40900 cr at the end-FY21

Tata Motors Key negatives:

During Q4FY21, Tata Motors wrote off one-time exceptional charge of Rs 14994 cr for JLR’s reimagining strategy
Tata Motors management highlighted that supply would be hit in the near term owing to COVID-19 lockdowns in India and semiconductor shortages worldwide

Tata Motors Key Risks:

Tata Motors business is dependent upon cyclical industries such as CVs and PVs
Moreover, Tata Motors business is present across the globe. Any slowdown or cyclical downturn in any of the locations, where the company has a strong presence, can impact its business and profitability.