| In Short |
| Tata Motors’ share price dropped 5% following a UBS ‘sell’ recommendation, with a potential 20% downside. |
| JLR’s premium models, which have been key to its recent success, face declining orders and potential discount increases. |
| Weakening demand in India’s commercial and passenger vehicle segments is adding to market challenges. |
| UBS predicts margin slippage in JLR and Tata Motors’ EV segment. |
The stock of Tata Motors eroded 5% on September 11, 2024, after UBS downgraded the stock to ‘sell.’ Citing various reasons that are weighing on the company’s financials, Tata Motors was witnessing unprecedented growth over the last few years, especially on the back of its luxury arm, Jaguar Land Rover (JLR). However, the first signs of cracks in this growth are slowly coming to light. Putting this together with the sequential decline in order backlog and incremental bookings at JLR, besides weakening domestic demand, UBS estimated a 20% downside in Tata Motors’ stock.
The Downfall: What Triggered the Drop?
UBS’ note identified many reason for concerns in Tata Motors, particularly regarding JLR’s profitability. When the premium models for JLR, like Range Rover, Defender, and Range Rover Sport, have shown improved revenues in the previous quarters, the said order book for these models has already fallen below pre-COVID levels, as noted by UBS. Adding to that is the possibility of increasing discounts and incentives for such models.
Adding to the pressure, commercial vehicle sales in India have started to show signs of softness, while passenger vehicles are performing below their regional peers. It will add to a broader concern about the ability of Tata Motors to sustain the recent success.
JLR’s Mixed Performance
We have viewed JLR as one of the main drivers of Tata Motors, driven by very strong demand for its Range Rover and Defender luxury models. UBS now thinks the long run for those models may be coming to an end. Range Rover, Defender, and Range Rover Sport have been JLR’s most profitable models; however, the backlog for the company is falling below expectations. Besides, the easing of the post-pandemic semiconductor shortage that had helped it this time by limiting production of lower margin models could drag down profitability in the quarters ahead.
Should You Buy, Hold, or Sell?
Investors are now left to make a tough choice. While Tata Motors has been an outperformer, its overdependence on premium models at JLR does come with some key risks, especially those related to market downturns. With UBS warning about a possible 20% downside, this may not be a warning to be belittled amidst global economic uncertainty and increasing competitiveness in the EV space.
The share of Tata Motors would continue to be volatile in the coming months, amid challenges both on the home front and abroad. Coupled with the increasingly competitive environment, the slowing growth at JLR raises doubts about the sustainability of Tata Motor’s financial performance at the current levels. Investors may take note that it is perhaps time to revisit the holdings in Tata Motors as the road ahead looks uncertain.
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