Why Is Investor Confidence In Tata Motors Ailing?

by Trefis Team
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Tata Motors’ (NYSE: TTM) stock price has nosedived from its 52-week high of $35 per share to $12 per share, largely because of weaker volumes of its Jaguar Land Rover in China. The stock price has been falling since the start of the current fiscal year and has now hit a 7-year low. Since the company’s Jaguar Land Rover (JLR) division is the cornerstone of its profitability, any slip in its volumes proves to be detrimental for the company.

We have a price estimate of $19 per share for the company. View our interactive dashboard – Tata Motors’ Price Estimate – and modify the key drivers to arrive at your own price estimate for the company.

Tata Motors reported weak sales volume in September, which has led to a sharp drop in its stock price. The JLR division reported total sales of 57,114 vehicles last month, down 12.3% year-on-year. The lower sales volume was due to the weaker demand in China amid the import duty change and trade tensions with the US. In fact, Chinese vehicle sales have been falling for major car makers including BMW and General Motors in the current fiscal year, as slowing economic growth, and a volatile foreign currency market, have added to the troubles from the trade war. Accordingly, these automakers had previously quoted the trade tensions as a reason for deteriorating Chinese sales that are negatively affecting their profitability and valuation.

Since Chinese sales account for around 25% of Tata Motors’ total demand, the declining demand in this market is likely to drastically impact the company. Consequently, the company’s JLR division announced a production halt of two weeks at its Solihull plant, UK. While this move was aimed at compensating for the weaker Chinese demand, it led to a severe sell-off of the company’s stock.

To add to this, Tata Motors had downgraded its long-term EBIT margin range of 7-9% in the last quarter, down from its initial guidance of 8-10% announced two quarters ago. This was largely driven by the pricing pressure due to the use of newer technologies to compete with its peers. However, with the declining demand from China, the company could experience a further contraction in its margins in the coming months. This could weigh on the company’s value in the near term. That said, the industry shift towards a mix of hybrid and electric cars could drive the company’s value in the long term.

 

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