The shares of #TATAMTRDVR on 6th June, 2021 were cruising at a 52-week high but have taken a sharp downfall after the company flagged the chip shortage issue.
The world is in the grips of a global chip shortage because of demand for semiconductors surging far beyond supply capacity. The tiny semiconductor chips are bringing the production of vehicles across the nation to a halt. Production at various factories owned by Mercedes-Benz, Audi and BMW, the three rivals of JLR, have been impacted since the last three months due to the shortage of chips costing them production loss.
Why should Tata Motors investors be concerned?
The chip shortage issue is more of a global phenomenon and not company-specific. The near-term chip supply crunch happened due to a fire in a Japanese plant supplier and a snowstorm in Texas.
Tata Motors commented that the chip shortage issue in Q2FY22 would be greater than Q1FY22 and expects the operating cash outflow of about 1 billion pound with a negative EBIT margin in Q2FY22 although the company is continuing to work to mitigate this and expects the situation will start to improve in the second half of the financial year. The chip shortage issue in Q2FY22 will result in wholesale volumes about 50% lower than what the company has planned initially. From the targeted 235,000 units during the first half of the year, the two Tata Motors-owned British brands are expecting to clock wholesales of 145,000 to 150,000 units.
While the present supply constraints continue, the company will continue to prioritize the production of higher-margin vehicles for the chip supply available as well as make a chip and product specification changes where ever possible to reduce the impact.
What"s the roadmap ahead?
In a conference call held on July 7, Adrian Mardell, CFO, JLR said that the supply of chips will come onboard in Japan and North America over the course of the second half and the production of vehicles will be higher in the second half than the first half of the year. In addition, the chip shortage is a temporary supply phenomenon and in the meantime, customer demand is growing for the company. JLR stated that the issue would be resolved over the next 12-18 months as supplier investment in new capacities comes on stream. The company claims that the shortages will neither have any impact on the product launch schedule of JLR nor the capital guidance of GBP 2.5 billion planned for the year. Yet, the company has been deterred to give any guidance on volumes, profit, and cash flow. Mardell insisted that investors should keep in mind that in the previous financial year the company managed to turn around the situation in the second half despite facing similar cash outflows in the first half of the year.
"If we get a very, very sharp return to normality in Q3, which I am not expecting, then guidance on revenue will be lower but EBIT margin and free cash will be close," he added. The luxury carmaker had previously guided for earnings before interest and tax margin of 4 per cent for FY22 and volume growth of 20 per cent. The company states that the big risk is not the market share fall as the cancellations are very few at this time.
Here is what brokerages have to say about the stock and the company after the announcement:
Nomura | Rating: Neutral | Target: Rs 353
The chip shortage is much higher than expected and free cash flow /EBIT will remain negative in H1FY22.
Production would improve in H2FY22 sequentially.
There is a risk of delayed launch of new Range Rover as well.
Impact on JLR is also worrying because it seems that the impact is much higher than what other luxury players have reported.
Given negative free cash flow, Nomura's FY22 debt assumptions have an upside risk.
Morgan Stanley | Rating: Equal-weight | Target: Rs 300
The impact of the chip shortage at JLR is much more than anticipated.
JLR, hit by chip shortage, guides for negative EBIT margin in H1FY22.
The key to monitor is that the demand environment in the second half of the fiscal remains healthy as production starts to recover then.
Jefferies | Rating: Buy | Target: Rs 435
Tata Motors has provided very weak guidance for the first half of the fiscal.
Cuts FY22 Ebitda and earnings per share by 10% and 44%, respectively.
FY23 earnings are broadly unchanged as semiconductor shortages will ease in time.
Despite the near-term pressure, Tata Motors is poised to deliver a strong turnaround by FY23, led by cyclical recovery and improved strategy at both JLR and India.
Kotak Institutional Equities | Rating: Sell | Target: Rs 205
JLR volumes to remain under pressure.
There is a potential downside risk to the FY2022E volume and EBIT margin assumptions.
Expects JLR's market share to remain under pressure once the order book of Defender, RR Evoque and RR Sport draws down.
Motilal Oswal | Rating: Buy | Target: Rs 400
All three of Tata Motors' businesses are in recovery mode.
While the Indian commercial vehicle business would see a cyclical recovery, the Indian passenger vehicle business is in a structural recovery mode.
JLR is also witnessing a cyclical recovery, supported by a favorable product mix.
However, supply-side issues will defer the recovery process.
While there would be no near-term catalysts from the JLR business, the Indian business would see a continued recovery.
Conclusion
The global shortage in chip supply will not only affect the second quarter performance of Tata Motors' arm Jaguar Land Rover but may threaten its revenue, margin, and free cash flow guidance for the current financial year. Investors should be cautious about the stock and also monitor the issue closely.