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Shares of Tata Motors Ltd rose 19% on Thursday, becoming the top winner between Nifty and Nifty Auto shares, with the news that its subsidiary, Jaguar Land Rover Ltd (JLR), has increased production in China, its key market, rekindling hope among investors
However, Tata Motors shares continue to drop 53% from their highs seen earlier this year. The stock had fallen as much as 67% between mid-January and early April, and the recovery since then has helped it recoup only about 20% of losses.
A sustained increase in sales may take some time, given the covid-19 pandemic and its impact on vehicle demand. However, the resumption of production in all countries suggests that the worst is behind the company.
The company said it has resumed three-quarters of its budgeted output in China, thanks to improved consumer demand. “In China, we are beginning to see a recovery in vehicle sales and customers are returning to our showrooms,” JLR said in a press release on April 23.
Sales in China, which represent approximately 20% of JLR’s global sales (retail sales data for the fourth quarter of fiscal 2014), fell 85% yoy in February, when the region was reeling from the coronavirus outbreak.
Despite the ray of hope, investors had better be wrong on the side of caution. “Despite a stronger than expected pickup in economic activity in March, China’s real gross domestic product growth fell to -6.8% yoy in the first quarter of 2020 from 6.0% in the fourth quarter of 2019 .. Despite its initial success in containing covid-19, China still faces two serious challenges: the collapse of external demand due to the pandemic and the growing threat of a second wave of covid-19 infections, “said a note from Nomura Research on April 29.
According to analysts, there may not be a short-term recovery in the UK and US markets. In the US, they account for 60-65% of JLR sales, even if things return to normal in China faster than expected. The impact of disrupting the global supply chain, coupled with increased competition as companies try to take over markets, are likely to affect profitability.
Additionally, it wasn’t long after Fitch Ratings Inc. downgraded Tata Motors’ long-term issuer default rating from “BB-” to “B” due to an estimated 50% drop in operating profit for the year. Fiscal 21. The negative outlook is painful at both JLR and the independent business at Tata Motors, where the commercial vehicle division faces a bleak outlook and the passenger vehicle division doesn’t offer much to drive.
As such, Tata Motors has countless hurdles to overcome before an increase in earnings per share supports the meteoric rise in share prices.
