A worker cleans a Jaguar F-pace automobile, produced by Tata Motors Ltd.’s Jaguar Land Rover unit. (Photographer: Chris Ratcliffe/Bloomberg)

Tata Motors Gains On JLR Turnaround Plan, Brokerages Cautious

Tata Motors Ltd. rose for a fifth straight session, the longest stretch of gains in seven months, after automaker initiated a turnaround plan for its struggling luxury car unit.

Jaguar Land Rover, which contributes almost 90 percent to Tata Motors' revenue, has been suffering due to uncertainty around Brexit and China demand. The automaker, which posted a wider-than-anticipated second-quarter loss, decided cut down its planned spending by £500 million. It will now spend £4.03 billion over the current and next financial year, according to the statement.

“We have taken a bearish view on volume growth and margin compared to consensus,” Deutsche Bank said in a report. “We have also assumed significantly weaker pricing and margin for the China business.” The German investment bank lowered its earnings per share forecast for the stock by 13 percent for the ongoing financial year and by 6 percent for the financial year ending March 2020.

Brokerage firm Jefferies too expects margin to remain weak in the third quarter on production cuts and continued dealer inventory reduction in China. It cut its target price for Tata Motors, besides CLSA and Macquarie.

“The risk of an unfavourable Brexit has risen with the March 2019 deadline approaching,” CLSA said. “The stock is down 65 percent since February 2017 and might appear cheap but is unlikely to deliver returns until the JLR outlook improves and clarity on Brexit emerges.”

These uncertainties forced Tata Motors to launch a turnaround plan for the unit. JLR has cut down its planned spending by £500 million for the ongoing and next financial years.

“This should reduce the pressure on cash flow, which will continue to be negative for the next two years,” Deutsche Bank said.

The stock of the homegrown automaker gained as much as 2.8 percent in early trade to Rs 184 apiece. The stock has declined 57 percent so far this year, making it the worst performer on the NSE Nifty Index.

Also read: Jaguar Land Rover Needs to Get Out of This Rut

Here are the highlights from the other brokerages:

CLSA

  • Maintains ‘Sell’ and cuts target price to Rs 170 from Rs 200 apiece.
  • Sees a potential downside of 5 percent.
  • The second quarter performance was weak as JLR reported loss for the second consecutive quarter.
  • The India business has improved but there’s always a risk of a downcycle.
  • Cuts FY19-21 earnings per share estimates by 10-28 percent on lower volume and margin estimates for JLR.

Jefferies

  • Maintains ‘Buy’ and cuts target price to Rs 300 from Rs 355 apiece.
  • Cut in planned spending was a positive move.
  • Key risks include weaker macro environment, loss of market share in global markets, higher investment, downcycle in commercial vehicles in India.

Macquarie

  • Maintains ‘Outperform’ and cuts target price to Rs 325 from Rs 485 apiece.
  • Sees a potential upside of 82 percent.
  • India business delivered a strong performance, but the JLR business reported an EBIT loss.
  • Shift in focus to profitability and cash flows are positive.
  • Target price cut on reduced Ebitda estimates for FY19 and FY20.