Stock Markets Analysis & Opinion

Tata Motors Achieves Strong Earnings and De-leveraging Milestones

Tata Motors (NS:TAMO) reported robust earnings performance, with its EBITDA surpassing Morgan Stanley (NYSE:MS)'s estimates by 4%. Despite a significant increase in investment spending, the company managed to achieve de-leveraging targets, reducing its consolidated net auto debt to INR 160 billion, marking a substantial decline from INR 292 billion in December 2023.

Notably, Tata Motors announced its highest-ever dividend payout of INR 6 per share, including an INR 3 special dividend, signaling confidence in its financial position. Morgan Stanley anticipates the company to achieve a net cash position (auto) of INR 74 billion in Fiscal Year 2025.

In the fourth quarter of Fiscal Year 2024, Jaguar Land Rover (JLR) recorded an EBIT margin of 9.2%, slightly above guidance. Looking ahead, JLR expects an EBIT margin of approximately 8.5% in Fiscal Year 2025 and aims for 10% in Fiscal Year 2026.

Despite demand weakness observed in the EU and UK markets, stability remains in North America and China. JLR's order book, standing at 133,000 units, surpasses pre-COVID levels, providing support for pricing strategies. Notable models expected in Fiscal Year 2025 include the RR BEV, SV offerings for the RR family, Defender OCTA, and a re-imagined Jaguar, slated for end-2024, albeit with low volumes but high-ASP/high-margin projections.

In the passenger vehicle (PV) segment, Tata Motors anticipates industry growth of less than 5% for Fiscal Year 2025. Key focal points include the launch of Curvv, CNG models, impact analysis of the Sanand margin, and incentives under the PLI scheme.

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While Tata Motors maintained its position as the second-largest PV Original Equipment Manufacturer (OEM) in India during the fourth quarter, challenges persist in EV profitability, with the EV segment reporting negative EBITDA margins. Tata Motors does not foresee a hybrid duty cut and does not plan to launch hybrids.

Despite Tata Motors achieving its major targets and exhibiting strong execution across segments, Morgan Stanley downgrades its rating to "Equal Weight" (EW). The current performance is deemed adequately reflected in the stock price. Key upside risks include a sharp EV-led turnaround in Fiscal Year 2025, while downside risks include intensifying competition in the PV business, both in India and globally.

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While Tata Motors demonstrates resilience and growth potential, investors should also look at its financial health check. This is the simplest way to know whether the stock you are planning to purchase is fundamentally strong or not.

InvestingPro’s financial health check feature analyzes over 100 parameters across various verticals such as profitability, momentum of the stock, etc. and gives a rating out of 5. Then a mean of all of taken to arrive at a final score. If this score is less than 3 then we can consider that stock as not-so-good for a portfolio.

In the case of Tata Motors, the rating of 4 clearly suggests a great performance, and therefore a buying-on-dip strategy can be implemented here.

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