Sharekhan maintains its Buy rating on Tata Motors Limited (TML) with a revised price target of Rs 1,099. Despite a challenging Q2FY2025, the company’s key segments — Jaguar Land Rover (JLR), Commercial Vehicles (CV), and Passenger Vehicles (PV) — are expected to strengthen in H2FY2025. Anticipated improvements include a recovery in JLR's production, sustained double-digit EBITDA margins in the CV segment, and solid momentum in PV sales driven by new launches. With plans to reduce net automotive debt and capitalize on emerging trends in electric vehicles (EV) and hydrogen fuel cells, Tata Motors is strategically positioned for growth.

JLR Segment: Recovery on the Horizon

Temporary Setbacks in Q2
JLR’s Q2FY2025 performance faced significant hurdles due to supply disruptions, particularly in aluminum. Flooding impacted its aluminum supplier, leading to a delay of 6,000 units in UK/EU markets. Consequently, JLR's volumes dropped by 10% year-over-year and by 11% quarter-over-quarter. However, these units are scheduled for sale in Q3FY2025, indicating a potential volume rebound.

Increased Variable Marketing Expenses (VME)
To counteract market challenges, JLR raised its VME from 1.1% of sales in Q2FY2024 to 4% in Q2FY2025, a strategy expected to continue. However, management’s outlook suggests a significant production and volume recovery in H2FY2025, aligning with the company’s annual targets.

Commercial Vehicles (CV): Robust Margin Sustenance

Stable Double-Digit EBITDA Margins
Tata Motors' CV business achieved a consistent double-digit EBITDA margin, sustaining a 10.8% margin in Q2FY2025. While the overall industry saw an 11% volume decline year-over-year due to infrastructure slowdowns, Tata Motors demonstrated resilience in its heavy commercial and passenger carrier segments.

Electric Mobility Initiatives
Tata Motors’ CV segment is advancing in electric mobility, with 550 electric buses delivered in Q2FY2025. This progress contributes to the 3,300 electric buses currently operating, reinforcing Tata Motors’ leadership in India’s public EV segment.

Passenger Vehicles (PV): Strategic Inventory and New Product Launches

Managing High Inventory Levels
The PV segment faced increased inventory ahead of the festive season, resulting in higher discount rates across the industry. Nevertheless, Tata Motors effectively controlled inventory levels by regulating wholesale dispatches, mitigating the impact of discounting on profitability.

Expanding the EV Portfolio
Despite the sector-wide decline in EV volumes, Tata Motors maintained a 67% market share in the personal EV segment. New launches, such as the Curvv and Nexon CNG, encountered minor production delays, but the Harrier EV and Sierra EV are slated for release in H2FY2025, signaling growth in Tata’s sustainable mobility offerings.

Financial Highlights: Revenue, Margins, and Debt Management

Revenue and Profit Decline in Q2FY2025
For Q2FY2025, Tata Motors' consolidated revenue dipped 3.5% year-over-year to Rs 1,01,450 crore. Operating profit dropped by 15% year-over-year to Rs 11,671 crore, with the EBITDA margin contracting 160 basis points to 11.5%. This decline was mainly attributed to subdued JLR and PV segment performance.

Debt Reduction on the Horizon
Despite a rise in net automotive debt from Rs 16,000 crore in FY2024 to Rs 22,000 crore in Q2FY2025, Tata Motors aims to lower this in H2FY2025, bolstered by anticipated JLR volume recovery. Long-term debt reduction initiatives, including the establishment of an in-house EV battery plant, are expected to streamline production and minimize reliance on external suppliers.

Strategic Outlook and Valuation

Growth in Key Segments and Product Differentiation
With positive forecasts for all core segments, Tata Motors is well-positioned for a strong H2FY2025. The CV segment’s growth, driven by infrastructure, mining, and e-commerce demand, and PV’s ongoing transformation with the “New Forever” portfolio and EV offerings will support a sustainable growth trajectory. Additionally, the integration of EV and hydrogen fuel cell technology reflects Tata’s forward-looking innovation strategy.

Valuation and Target Price
Sharekhan values Tata Motors at a P/E multiple of 12.2x and EV/EBITDA of 5.3x on FY2027 estimates, recommending a Buy rating with a price target of Rs 1,099. This target reflects confidence in JLR’s upcoming revival, PV and CV segments’ growth, and Tata Motors’ financial prudence in managing debt.

Investment Risks

Exposure to Cyclical Markets
Tata Motors’ performance is tightly linked to the cyclical CV and PV sectors. A downturn in any key region could impact revenues, particularly with operations spread globally.

Global Semiconductor Shortage
Although semiconductor supply has improved, a re-emergence of shortages could disrupt Tata Motors’ production plans, affecting delivery schedules and financial performance.

This analysis reflects Sharekhan’s confidence in Tata Motors’ resilient outlook, balanced with strategic debt management, innovations in EV technology, and a diversified product line to navigate industry fluctuations effectively. Investors are encouraged to monitor Tata’s progress in upcoming quarters as the company targets growth and financial stability across its segments.