Tata Motors Shares Fall On Chip Shortage Woes, But Most Brokerages Stay Bullish

Shares of Tata Motors Ltd. fell to the lowest in two months after the automaker's luxury arm said it expects chip shortages to worsen in the ongoing second quarter, hurting sales. Still, that didn't deter most analysts from staying bullish on the company.

Jaguar Land Rover on Tuesday said chip shortages in the quarter ending September are expected to be greater than in the preceding three months, resulting in wholesale volumes about 50% lower than planned during the period.

Chip shortage is very dynamic and difficult to forecast, Tata Motors said in an exchange filing. “Some level of shortages will continue through to the end of the year and beyond.” The company, however, will prioritise production of higher margin vehicles using the available chip supply, and expects the situation to start improving in the second half of the ongoing financial year.

Analysts, too, expect Tata Motors to start to turn around by the next fiscal, defying the near-term pressures.

Shares of Tata Motors fell as much as 3.36% to Rs 306.25, the lowest in two months, before paring losses. Today's losses come on the back of the 8.4% decline posted late on Tuesday. Of the 34 analysts tracking the stock, 21 have a ‘buy' rating, seven suggest a ‘hold' and six recommend a ‘sell', according to Bloomberg data. The average of 12-month consensus price targets implies a upside of 16.2%.

Here's what brokerages made of Tata Motors' update:

• Maintains ‘buy' rating, cuts target price to Rs 435 apiece from Rs 455.

• Tata Motors has provided very weak guidance for the first half of the fiscal.

• Cuts FY22 Ebitda and earnings per share by 10% and 44%, respectively; FY23 earnings are broadly unchanged as semiconductor shortages will ease in time.

• Despite the near-term pressure, Tata Motors is poised to deliver a strong turnaround by FY23, led by cyclical recovery and improved strategy at both JLR and India.

• Maintains ‘neutral' rating with a target price of Rs 353 apiece.

• “The chip shortage impact in the first half of FY22 is much higher than our expectation and has put our FY22 volume estimates of 483,000 at risk by more than 10%, especially if the impact remains significant in the second half.”

• There is a risk of delayed launch of new Range Rover as well.

• Given negative free cash flow, the brokerage's FY22 debt assumptions have an upside risk as well. “We will track management commentary on FY22F volume guidance.”

• Impact on JLR is also worrying because it seems that the impact is much higher than what other luxury players have reported. For instance, BMW commented that it has only lost 30,000 units due to chip shortage. Daimler also indicated its deliveries were impacted in June 2021 and expects the impact to continue over the next two quarters.

• “Currently, our global team expects chip shortage to start easing from September 2021 onwards.”

• Maintains ‘equal-weight' stance with a target price of Rs 300, implying a potential downside of 13%.

• The impact of the chip shortage at JLR is much more than anticipated. Key to monitor is that the demand environment in the second half of the fiscal remains healthy as production starts to recover then.

• “Increases Ebitda estimates for JLR and moving our valuation horizon to 12 months ending June 2023, partially offset by decline in India business Ebitda and increase in share count, drive our price target to Rs 300.”

• Maintains ‘buy' rating with a price target of Rs 425 apiece.

• Expects improvement in operating performance and financial deleveraging across Tata Motors' all three businesses over the next three years.

• Values India business at 10 times the FY23 Ebitda, given early stages of demand upcycle in commercial vehicles and structural turnaround in passenger vehicles business.

• Values JLR business at 2.2 times FY23 Ebitda, in line with European premium car peers.

• Key risk: The impact of Covid-19 on sales and production in India and the slower-than-expected economic recovery in India in FY22.

• Maintains ‘buy' rating with a target price of Rs 400 per share.

• All three of Tata Motors' businesses are in recovery mode. While the India commercial vehicle business would see a cyclical recovery, the India passenger vehicle business is in a structural recovery mode. JLR is also witnessing a cyclical recovery, supported by a favorable product mix.

• However, supply-side issues will defer the recovery process. While there would be no near-term catalysts from the JLR business, the India business would see a continued recovery.