What Went Wrong For Tata Motors

Shares of Tata Motors Ltd. have dropped over 40 percent year-to-date as the automaker continues to face headwinds at Jaguar Land Rover—which contributes 78 percent of its sales. Lower sales at the luxury unit led to its parent’s worst loss in nine years in the quarter ended June.

Here’s what went wrong for the company:

Muted Volume Growth

Sales of JLR took a hit and its volume growth slowed to low single digits in the past few months due to a combination of the following factors:

• Uncertainty regarding diesel cars in Europe.
• People in China deferring purchases ahead of the country’s move to cut import tariffs on cars.
• Heavy discounting in the company’s current inventory in China.

Forex Losses Weigh

Volatility in the U.S. dollar against the pound sterling—and the subsequent forex losses—has adversely impacted JLR’s profitability.

Ongoing investments, capital expenditure and product development costs have risen significantly over the past few quarters, which has led to a corresponding increase in JLR’s net debt and negative cash flows. The automaker plans to spend nearly £4.5 billion on a full-year basis, which could further increase cash-burn and debt levels.

The Analyst Who Got It Right

Despite its stock slide, analysts have retained faith in India’s largest truckmaker. Nearly 75 percent of the analysts tracking Tata Motors have a ‘Buy’ rating on its stock with an average target price of 385, according to data compiled by Bloomberg. That implies an upside of nearly 50 percent.

Nitij Mangal, auto analyst at CLSA, has a contrarian view, which has also been the most accurate. Mangal had downgraded the Tata Motors scrip to “sell” in February 2017 when it was trading above Rs 500. The stock closed 0.36 percent higher at Rs 265.05 on Wednesday.

CLSA maintains its rating. It has revised its target price to Rs 250—one of the lowest—after the automaker announced its results for the June ended quarter. The brokerage said Tata Motors’ earnings and sales will be adversely impacted due to an overall weak outlook. It attributes it to subdued demand in the West, uncertainty over diesel vehicles, an ageing portfolio and rising competition in the SUV segment.

“JLR is now vulnerable to any sharp cyclical slowdown in demand as well as geopolitical risks from the U.S. import tariffs and Brexit," said Mangal in a recent report on Tata Motors.