Shares of Tata Motors Ltd. have fallen 23 percent in the last one year, making it the worst performer among peers in the Nifty Auto Index. They are trading 40 percent lower than the 2016-end peak. The company’s stock and DVRs are among the three worst performers on the index so far this year.
But six factors could improve the risk-reward for the stock, Goldman Sachs wrote in a note to clients. While the turnaround in India business is positive, any meaningful rally in the stock hinges on positive surprises from the Jaguar Land Rover unit, the brokerage added. JLR is 72 percent of the company’s sum-of-the-parts valuations, it said.
Factors That Could Aid Tata Motors
- An upcycle in global luxury car market will push up volumes, improving the mix and lower variable marketing spend.
- The new Range Rover and Range Rover Sport facelifts have the potential to arrest and reverse the weakening mix and pricing trends.
- Success of launches amid stiffer competition will strengthen JLR’s position, aiding margins and free cash flows.
- A play on diesel making a comeback and the hope of electric vehicles slowdown. A rapid shift towards EV will hurt JLR’s capital expenditure and margins on account of technological gap.
- Lower capex in new product or technology could be a boon for JLR amid moderating volumes growth, tight competition and negative free cash flow yield.
- A turnaround in domestic business.
Tata Motors is the cheapest auto stock with single digit price-to-earnings ratio for the ongoing in financial year. That compares with 28 times PE multiple for Maruti Suzuki India Ltd.—the most expensive auto stock.
Most brokerages are bullish on Tata Motors. 26 of the 35 analysts tracking the stock have a ‘Buy’ rating, while one has a ‘Sell’ on it, according to Bloomberg. The consensus return potential is 31 percent. Only BNP Paribas has a target which is lower than the current price of Rs 356 a share.