Tata Motors rating – Buy: Semiconductor shortage to hit volumes

Tata Motors (JLR) has indicated that acute global semiconductor shortage is impacting its production. Taking cognisance of the same, we are revising down FY22e volumes by ~102k units assuming the challenges will persist till Q3FY21. Hence, we are revising down FY22e PAT by ~65%, but retaining FY23 estimates.

We expect global pricing power led by supply constraints and a sharp jump in used vehicle prices. We assume JLR will prioritise production of most profitable models in FY22. Maintain ‘Buy’ with a revised TP of Rs 405 (earlier Rs 436) as we roll over to Dec-22e. Sustained supply constraint is a key risk as H2 volumes are higher than H1.

Semiconductor shortage heating up
JLR press release indicates: (i) Loss of production of 30K in Q1FY22; (ii) expects production to fall by 50% versus earlier planned; (iii) expects Ebit loss and operating cash outflow of GBP2 bn; (iv) demand outlook is extremely strong with outstanding retail orders of 110K units–highest in the company’s history.

Will things normalise from Q4FY22?
As new capacities are expected to come on-stream over the next 12-18 months, we expect some shortage of semiconductors to persist till then. However, we are assuming normalisation (as it existed till Q4FY21 – JLR lost ~7K units of production). This is our base assumption and remains a key variable. It’s pertinent to note that H2 and especially Q4 are generally most important quarters for JLR.

Outlook: Short-term pressure
India and JLR are on the cusp of a strong demand and product cycle tailwind. This should facilitate balance sheet improvement. Hence, we maintain ‘BUY/SO’ with a TP of `405 (JLR at 6.5x Ebit, India at 15x Ebitda). The stock is trading at FY22/23e PER of 30.5/9.1x.

We have assumed normalisation of shortage by Q4FY22. We expect JLR to accelerate its cost efficiency programme and focus on optimising its product mix to limit the impact.