Five Reasons Why Tata Motors Stock Has Surged 50% Since Posting Biggest Loss

Tata Motors Ltd. has been the year’s best-performing Nifty 50 stock after Yes Bank Ltd., recovering from the slide after posting the biggest quarterly loss by an Indian company.

Shares of the owner of Jaguar Land Rover have jumped 38 percent compared with Nifty 50’s 8 percent rise so far in 2019. It has soared more than 50 percent since its record loss of Rs 27,000 crore in the quarter ended December because of a write-down at JLR.

Here are the five reasons why Tata Motors is rallying:

Promoters Increase Stake

The parent of the automaker, Tata Sons Ltd., bought 3.16 crore shares, or 1.1 percent stake, after the record loss, boosting confidence in the company.

Credit Default Swaps Drop

Jaguar Land Rover’s five-year credit default swap maturing in December 2023—a contract that covers the risk of a possible default in debt—has fallen 33 percent after hitting an all-time high in February. Similarly, one-, two-, and three-year CDS contracts have also fallen, signifying strength in the bonds and that the risk of a default has abated considerably.

China Impact

China is one of the biggest markets for JLR—which contributes nearly three-quarters of the revenue of Tata Motors. The country’s share in JLR’s retail sales fell from 24 percent in the year ended March 2018 to 19 percent in 2018-19.

But the trade war concerns between the U.S. and China have receded, India’s neighbour reported better-than-expected GDP growth at 6.4 percent in the quarter ended March, and the manufacturing purchasing managers index suggests an improvement. Investors expect a stable economy to boost sales of JLR in China.

Easier Car Licence Norms

China’s National Development and Reform Commission is planning to ease controls on car licences in major cities, Caixin, a Beijing-based news company, reported.

If car licensing controls are relaxed in tier 1 cities, it would benefit luxury carmakers, including JLR, Binay Singh, an analyst at Morgan Stanley, wrote in a note. Removing licence plate restrictions would help overall auto volumes, it said.

The brokerage’s China auto team confirmed the discussions but said implementation may be difficult. That’s because the government is trying to control congestion and air pollution in major cities by restricting new car licences for fossil-fuel driven vehicles.

Growth Outside China

JLR’s retail volumes declined 6 percent year-on-year in 2018-19, largely because of a 34 percent drop in China. Outside China, the sales grew 3 percent, supported by the launch E-Pace and I-Pace and full-year Velar volumes. It was driven by 8 percent growth in the U.K. and better sales in the U.S.

Sonal Gupta, analyst at UBS, expects next-generation Evoque and the ramp-up in I-Pace as the key volume drivers for JLR in FY20.

Analyst Take

About 45 percent of the analysts recommend a ‘Buy’ and 43 percent suggest ‘Hold’, according to estimates tracked by Bloomberg. The remaining 12 percent suggest ‘Sell’. The 12-month price target implies a 10 percent potential downside. After the recent rally, the sell calls rose from 3 percent to 12 percent.

Shares of Tata Motors were trading nearly 3 percent higher at Rs 237.4 apiece as of 2:30 p.m. on the NSE. Morningstar has the highest target at Rs 580, followed by LKP Securities at Rs 350 and CIMB at Rs 305. BNP Paribas and Reliance Securities continue to be bearish with a target price of Rs 125 and Rs 135, respectively.