Tata Motors is India's largest Commercial Vehicle (CV) company and fourth-largest Passenger Vehicle (PV) player. In the domestic market, the company has products in the compact and mid-size cars and utility vehicle segments. Through subsidiaries and associates, the company has operations in the UK, South Korea, Thailand, and Spain. The key among them is Jaguar Land Rover (JLR), the business comprising two iconic British brands – Jaguar and Land Rover.

Large Impact on Auto Sector

Before the Covid-19 impact, the auto sector had already undergone considerable slowdown over the last 12-18 months due to structural changes beginning with higher GST rates, shift to Shared Mobility, Axle-load reforms, BS-IV transition and E-vehicles.

COVID-19 came as a final straw, impacting the March quarter earnings. Tata Motors posted a steep loss of Rs 9,900 crore with the global as well as the domestic business coming under severe stress.

Quarterly Financial Performance

The weak financial performance has led the company to drastically reduce its capital expenditure plans. It has proposed to cut the expenditure on Jaguar Land Rover by half to £2.5 billion this year as compared to the original plan of £4 billion. The India business will also see a 66% cut in capital expenditure to Rs 1,500 crore for the ongoing fiscal year 2021. The Tata Motors board is also working on a strong deleverage plan, which is a strategic shift to ensure sustainable businesses going forward.

Jaguar Land-Rover Division - Signs of Recovery

Amid the weak demand scenario, a few signs of revival are visible for Jaguar Land Rover (JLR) in markets such as the US, Europe, and China. The JLR May sales rose 4% to 8,068 units from a year ago in China, where the economy has gradually opened after months of restrictions aimed at curbing the coronavirus pandemic.

The management is expecting the first quarter of the fiscal year 2021 to be significantly weak for Jaguar Land Rover as well as its Standalone business. The company expects cash outflow of £2 billion in the Jaguar Land Rover business and Rs 5,000 crore in the standalone business due to macroeconomic challenges.

However, Jaguar Land Rover is expected to turn cash positive by fiscal year 2022 while the Passenger Vehicle business, which was recently broken off as a separate entity, is expected to turn cash positive by the fiscal year 2023. Passenger Vehicle (PV) portfolio is expected to report gradual recovery in sales going forward. Evoque and Discovery Sport are also seeing strong demand; Defender has a sizable order book of more than 22,000 units.

Teji or Mandi?

Business risks are expected to remain high, especially in the context of the Covid-19 outbreak. Moreover, Jaguar Land Rover continues to face challenging market conditions, especially in Europe and China.

As there is less chance of business turning profitable with management being cautious for the next quarter, investors should remain careful in Tata Motors due to its uncertain outlook. Our take is a Mandi for Tata Motors in the coming quarters

Teji Mandi is a proactive investment manager for everyone.To read more of our research, please visit https://blog.tejimandi.com