Sharekhan Research maintains its BUY recommendation for Tata Motors Ltd (TML) with an unchanged target price of Rs 1,319. Despite a 10% year-on-year decline in Jaguar Land Rover’s (JLR) volumes in Q2FY2025 due to production constraints, Tata Motors remains poised for a strong recovery in the second half of FY2025. With improved production and demand forecasts for its JLR, Passenger Vehicle (PV), and Commercial Vehicle (CV) businesses, along with reduced net automotive debt, Sharekhan's outlook for the stock remains bullish, projecting continued growth and profitability improvements.

JLR’s Temporary Production Constraints to Ease in H2FY2025

In Q2FY2025, Jaguar Land Rover (JLR) reported a 10% year-on-year decline in volumes as production was constrained by supply disruptions. Production volume stood at 86,000 units, down by 7% year-on-year. This decline was largely attributed to high-grade aluminum supply issues and quality control checks on 6,500 vehicles, mainly in the U.K. and Europe. Despite these challenges, JLR’s most profitable models, including Range Rover, Range Rover Sport, and Defender, accounted for 67% of total wholesale volumes. A recovery in production is expected in H2FY2025, with volumes likely to surge as supply disruptions ease.

Company-Specific Issues Impact BMW’s Margin Guidance

Sharekhan emphasizes that the BMW EBIT margin cut to 6-7% for CY2024 should be viewed as a company-specific issue rather than an industry-wide concern. BMW’s margin downgrade was driven by issues related to a vendor-supplied Integrated Braking System (IBS) and weak demand in China, particularly in Q3CY2024. Given that these problems are unique to BMW, Tata Motors is unlikely to experience the same challenges, and JLR’s outlook for EBIT margins of 8.5% or higher for FY2025 remains intact.

H2FY2025 Expected to Outperform H1FY2025

Despite a subdued performance in H1FY2025, JLR is on track to achieve a strong recovery in the second half of the fiscal year. JLR’s FY2025 guidance includes revenues of GBP 30 billion, an EBIT margin of 8.5%+, and a shift to net cash-positive operations. The Commercial Vehicle (CV) and Passenger Vehicle (PV) businesses have also been subdued, with volumes declining by 7.6% and 3.7% respectively in H1FY2025. However, these segments are expected to see a significant rebound in the second half, especially as infrastructure projects and e-commerce drive demand for commercial vehicles.

Financial Performance and Projections

Tata Motors’ consolidated revenues are expected to grow from Rs 2,78,454 crore in FY22 to Rs 5,41,768 crore by FY26E, with revenue growth of 12.7% projected for FY26. EBITDA is forecasted to increase from Rs 24,813 crore in FY22 to Rs 82,306 crore by FY26, with operating profit margins (OPM) expanding from 8.9% in FY22 to 15.2% by FY26E. Net profits (APAT) are expected to rise sharply, from a loss of Rs 10,719 crore in FY22 to a profit of Rs 31,302 crore by FY26E, with EPS projected at Rs 82 in FY26.

The stock currently trades at P/E of 14.2x FY25E earnings and 11.4x FY26E earnings, suggesting a favorable valuation relative to the company’s growth potential. Tata Motors’ RoE is expected to rise to 25.3% in FY25E, making it an attractive option for long-term investors.

Focus on Reducing Net Automotive Debt

Tata Motors continues to prioritize reducing its net automotive debt. With positive free cash flow and operational improvements across its business verticals, the company aims to achieve zero net automotive debt in the near future. Commodity prices are expected to remain range-bound, further aiding the company's profitability. Additionally, the development of an EV battery cell plant within the Tata group will help speed up product validation and reduce reliance on external suppliers.

Target Price and Valuation

Sharekhan maintains its BUY rating with a target price of Rs 1,319, representing an upside potential from the current market price of Rs 932. The valuation is based on a sum-of-the-parts (SOTP) approach:

Passenger Vehicle (PV) business: Valued at Rs 196 per share (14x FY26E EBITDA)
Commercial Vehicle (CV) business: Valued at Rs 396 per share (14x FY26E EBITDA)
JLR business: Valued at Rs 660 per share (4x FY26E EBITDA)
Adding the China JV (valued at Rs 39 per share) and Tata Technologies (valued at Rs 46 per share), the total equity value per share is Rs 1,319.

Key Risks

Despite the strong outlook, Tata Motors faces certain risks:

Cyclical nature of CV and PV segments: Demand fluctuations in these segments, especially during a global economic slowdown, could impact sales and profitability.
Global presence and exposure to economic downturns: Tata Motors operates across multiple geographies, and any economic slowdown in key markets like the U.K., Europe, and China could adversely affect its operations.
Semiconductor shortages: The ongoing global chip shortage could further impact production and vehicle deliveries, particularly in the luxury vehicle segment.

Conclusion

Tata Motors is well-positioned to capitalize on improving global demand, particularly in the luxury vehicle segment through JLR, while also benefiting from strong growth in its domestic CV and PV businesses. The company’s focus on reducing automotive debt, coupled with a robust recovery expected in H2FY2025, makes it an attractive investment opportunity. Sharekhan’s target price of Rs 1,319 reflects confidence in Tata Motors' ability to deliver sustainable growth, driven by operational efficiencies and market expansion. Investors seeking exposure to a leading player in the global automotive sector should consider Tata Motors for long-term gains.