4 growth drivers that can help this Big Bull stock generate up to 35% return

New Delhi: Shares of have been on the investor radar since the last five quarters, helping the homegrown automaker to deliver over 400 per cent return from its March 2020 lows. The stock has risen up to 90 per cent so far in Calendar 2021 to settle at Rs 344 on Thursday.

Jefferies sees a further 35% per cent potential upside in the stock. The global brokerage has initiated coverage on the Tata group scrip, calling it a ‘new quinquennial’ stock.

Ace investor Rakesh Jhunjhunwala owns 42,750,000 equity shares, or 1.3 per cent stake, in the company. At the stock’s current price, the Big Bull’s stake would be worth Rs 1,750 crore, making it the biggest holding in his portfolio after Titan company.

Engines of growth
Jefferies said a confluence of improved strategy and cyclical recovery should drive a big turnaround in Tata Motors’ performance. The brokerage sees four key drivers for the stock over the medium term.

Under new management, Jaguar Land Rover‘s (JLR) is focused on improving profit and cash flow with an emphasis on selling higher-margin SUVs and reducing break-even and warranty costs. “A cyclical demand recovery and new launches should also help. JLR has turned prudent in its investments and the industry’s easing spend intensity has come as a relief,” the brokerage said.

JLR has already embarked on an electrification journey, giving itself a fresh chance. Jaguar will shift to a BEV-only platform in 2025, potentially improving a weak franchise. JLR will consolidate from 6 to 3 platforms and have BEVs on all models by 2030.

Tata Motors lost market share in the truck segment during FY12-18, but has since become aggressive and managed to stabilise market share. The truck market has a concentrated focus, with high operating leverage. “Margins should improve as the cycle recovers,” the brokerage said.

Jefferies says Tata Motors’ passenger vehicle franchise has taken a big hit in the past decade, and past attempts to regain share have met with little success. The new SUV-focused strategy and product styling hold more promise.

The brokerage has a ‘buy’ rating on Tata Motors with a price target of Rs 455, about 32 per cent higher from Thursday’s closing price of Rs 344. According to Jefferies, Tata Motors can reach a new lifetime high of Rs 590 in an ideal bull case, while the downside is capped at Rs 295 in a bear case scenario.

Management Take
Shailesh Chandra, president of the passenger vehicle (PV) business at Tata Motors, said sustained volume momentum and a structured cost-cutting exercise have put the car division in a self-sustaining mode.

“Tata Motors has slowed down its search for a partner in the passenger vehicle segment and is, instead, looking to chart a new plan on its own, buoyed by a turnaround in the business,” he said.

The company’s board on June 14 approved a proposal to raise up to Rs 500 crore through the issue of securities on a private placement basis. The auto major also said it had bagged an order for 15 hydrogen-based fuel cell buses from IndianOil.

June Sales
Tata Motors has posted good volume recovery on a month-on-month basis. Total domestic sales have grown 78 per cent to 43,704 units, while total domestic commercial vehicle sales grew by 107 per cent to 19,594 units. Passenger vehicle sales expanded 59 per cent to 24,110 units.

“We expect the scenario to improve gradually for CVs during the second of Calendar 2021 with better freight availability and pickup in construction,” said Milan Desai, Lead Equity Analyst, Angel Broking.

“We have a positive view on the stock due to factors such as focus on electrification, focus on profitability, and cash flows at JLR and rebound in overall demand.”

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