Tata Motors stock down 5% on likely 1.2 bn pound JLR loss due to Brexit, but Nomura sees 89% upside

Tata Motors share price plunged as much as 5.4 percent in morning to hit a fresh 52-week low of Rs 252.55 on Thursday as investors worried about likely loss to the company due to Brexit.

Britain's biggest carmaker Jaguar Land Rover (JLR) said on Wednesday a so-called "hard Brexit" would cost it 1.2 billion pounds ($1.59 billion) a year, curtailing its future operations in the United Kingdom.

"We urgently need greater certainty to continue to invest heavily in the UK and safeguard our suppliers, customers and 40,000 British-based employees," JLR's Chief Executive Ralf Speth said in a statement.

Speth's comments come ahead of a meeting this Friday between Prime Minister Theresa May and her cabinet ministers to decide on strategy for Britain to negotiate its way out of the European Union, ending a 40-year trading relationship.

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Because of uncertainty about what Britain actually wants from the EU after it leaves, the outcome of the cabinet meeting is seen as critical to progress in talks with the EU on the issue.

"A bad Brexit deal would cost Jaguar Land Rover more than 1.2 billion pounds in profit each year. As a result, we would have to drastically adjust our spending profile; we have spent around 50 billion pounds in the UK in the past five years - with plans for a further 80 billion pounds more in the next five," Speth said in a statement.

"This would be in jeopardy should we be faced with the wrong outcome."

In fact, the stock has been under pressure throughout the year, falling more than 40 percent in 2018 so far, on top of 8.5 percent loss in previous calendar year. The loss likely due to Brexit and continued earnings concerns due to JLR (though domestic business has been improving) added pressure on the stock.

The consistent correction made the stock attractive for the brokerage houses which are still bullish on the company on hopes of big earnings improvement in JLR on likely launches going ahead.

Nomura has maintained Buy call on Tata Motors with a target price of Rs 495, implying a 85 percent potential upside.

JLR's US sales in the month of June grew by 7 percent YoY are below the estimate of 10 percent growth, Nomura said.

Land Rover supported volumes with 21 percent YoY growth while Jaguar volumes continued to remain weak, falling 20 percent YoY.

For June, Nomura expects 3 percent growth in overall retails for JLR and 1 percent growth in wholesales.

Meanwhile, last month, JLR highlighted its business challenges & strategies for the way forward.

JLR has laid down its strategy that focuses on 1) increasing its offering of advance driver-assistance system (ADAS) that is shaping up the industry; 2) to launch four new models thereby taking total nameplate to 16 by FY24E; 3) focus on cost (via engineering capabilities, globalise sourcing & managing SG&A) and; 4) improving the financial performance (for FY19-21E, its EBIT guidance maintained at 4-7 percent while investment is expected to be 4.5 billion pound per annum).

While having a Buy rating with a target price of Rs 355, ICICI Securities said the huge investment will have near term impact on cash flow though the same will improve, going forward. "TML is implementing a turnaround strategy in its standalone business. JLR��s huge investment in FY19-21E will result in negative cash flow remaining a near term concern."

Further, given that diesel uncertainty in UK, European markets still persist (diesel vehicle account 87 percent of volume in Q4FY18), the research house reduced its FY20E revenue, EBITDA, PAT estimate by around 7 percent, 8 percent, 9 percent, respectively.

However, given the luxury automotive industry demands for huge investment that is necessary to move parallel/or remain ahead of evolving dynamics, ICICI Securities believes JLR is making right moves in terms of future strategies.

It further believes lower than expected demand in the wake of huge capex may further impact its financial performance and remains a key risk for the company.

At 09:36 hours IST, the stock price was quoting at Rs 257.80, down Rs 9.20, or 3.45 percent on the BSE.

(With inputs from Reuters) First Published on Jul 5, 2018 10:03 am