What's happening with Tata Motors? and what you should do...
1. Simple explanation is Market discounts the future, i.e. stock moves as per what will happen in future and not on present or what has happened in the past.
A detailed analysis of current situation with Tata,
Please understand the stock has moved nearly 99% in less than a year and that was because of the expectations.
1. Tata will start earning profit - achieved.
2. Tata will reduce their net debt - Tata India operations are debt free, JLR reduced debt from 46k crores to 17k crores, that too will be repaid this year. - Achieved
3. Tata will earn free cash flow of $2B - Achieved.
4. EBITDA Margins of 14% - Achieved - Basically Tata motors saves 14% of every 100Rs. to themselves and profit of nearly 8%
5. Reaching 25% Market share in India - They are currently second ranked in India with 50k monthly sales.
6. Tata Technologies IPO and raising 3000 Cr for debt repayment - Achieved.
7. Demerger of Business into two separate companies - Planned, Due diligence started - Stock moved up 5.5% on 5th Feb on this news.
All of this was promised in 2019-2020 and again in 2020-21 Annual Reports - and all of this has been delivered. This was the same reason I bought the stock - This was the same reason everyone else bought the stock and the stock has moved from 130 in Sept 2020 to 1040 600% gain in 4 years, or CAGR of 64%. Attaching the screenshot below (Exhibit 1) Market discounted everything
but now, in Q4 earnings report company said
1. We may not able to sell higher number of cars in June and Sept Qtrs (Company is still hopeful about the sales in Dec and March Qtr)
2. Margin expansions in JLR from 14% to 16% is not possible in the coming year. (Its not going to fall from 14% either)
3. Commercial Vehicle business will see a fall of 5-8% sales this year. (big negative) - Imagine if Tata Motors and Tata Trucks were two separate business only the trucks division had fallen and Tata Motors would have sustained with a smaller deep. This is the exact reason company is going to demerge two businesses.
Plus JLR has 4 big launches in this year - Fully electric Range Rover, Range Rover sport and Defender and GT car under the brand of Jaguar - their acceptance by the market is not known, JLR are already behind in the electric car race but if they get the sales number equal to rivals the story will shift. So basically Tata Motors may not see any significant sales and EPS growth for FY24-25, but when you hold a stock for long term you should consider what will happen in 4- years or 5 years. When the COVID crisis had hit the supply chain of semiconductor chips the stock did not move a single percent for 18 months (Exhibit 2) From October 2021 to May 2023 stock was near 450, I had advised everyone to hold on as company was getting ready for the future.
Now, what to do?
Tata Motors has achieved all their targets, has grown rapidly and has now turned from a growth stock to a value stock. Basically a good company with solid fundamentals, less risky (than before) and hence moderate returns (10-15% p.a.) These are my assumptions. Based on this data you decide, do you want fast growth - then look elsewhere, do you want stability and possibly continuous flow of dividends, then stay.
I have planned to exit 20% of my holding in few months, I was anyway going to sell the Commercial Vehicle business as and when the company proceeds with demerger and then I will hold the passenger vehicle business for as long as company keep making cars or people keep buying them. For those who wish to exit Tata Motors, I do have one question - What are you gonna do with the funds, how confident are you about a new company? and For those who wish to hold on to stock - Happy Investing!!!
- Chinmay
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