Tata Motors rating – Buy: Semiconductor shortage to hit volumes

Therefore, we’re revising down FY22e PAT by ~65%, however retaining FY23 estimates.

Tata Motors (JLR) has indicated that acute world semiconductor scarcity is impacting its manufacturing. Taking cognisance of the identical, we’re revising down FY22e volumes by ~102k models assuming the challenges will persist until Q3FY21. Therefore, we’re revising down FY22e PAT by ~65%, however retaining FY23 estimates.

We anticipate world pricing energy led by provide constraints and a pointy soar in used car costs. We assume JLR will prioritise manufacturing of most worthwhile fashions in FY22. Keep ‘Purchase’ with a revised TP of Rs 405 (earlier Rs 436) as we roll over to Dec-22e. Sustained provide constraint is a key danger as H2 volumes are greater than H1.

Semiconductor scarcity heating up
JLR press launch signifies: (i) Lack of manufacturing of 30K in Q1FY22; (ii) expects manufacturing to fall by 50% versus earlier deliberate; (iii) expects Ebit loss and working money outflow of GBP2 bn; (iv) demand outlook is extraordinarily sturdy with excellent retail orders of 110K models–highest within the firm’s historical past.

Will issues normalise from Q4FY22?
As new capacities are anticipated to come back on-stream over the following 12-18 months, we anticipate some scarcity of semiconductors to persist until then. Nevertheless, we’re assuming normalisation (because it existed until Q4FY21 – JLR misplaced ~7K models of manufacturing). That is our base assumption and stays a key variable. It’s pertinent to notice that H2 and particularly This autumn are usually most vital quarters for JLR.

Outlook: Quick-term strain
India and JLR are on the cusp of a powerful demand and product cycle tailwind. This could facilitate stability sheet enchancment. Therefore, we preserve ‘BUY/SO’ with a TP of `405 (JLR at 6.5x Ebit, India at 15x Ebitda). The inventory is buying and selling at FY22/23e PER of 30.5/9.1x.

We have now assumed normalisation of scarcity by Q4FY22. We anticipate JLR to speed up its price effectivity programme and concentrate on optimising its product combine to restrict the impression.