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Buy, Sell, or Hold? What Should Investors Do with Tata Motors’ Share

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Tata Motors, part of the Tata Group, is one of the world’s leading vehicle manufacturers. It builds gasoline and electric cars, sports utility vehicles, trucks, buses, anddefence vehicles. It has operations in the United Kingdom, India, South Korea, South Africa, China, Brazil, Austria, and Slovakia through a network of subsidiaries and joint ventures.The company generates most of its revenues from its flagship subsidiary Jaguar Land Rover in the UK. 

It is also investing heavily in electric vehicles and is one of the frontrunners in this space in India.In recent years, the company has managed to gain market share in the domestic market thanks to a few new launches that are being received well by the customers. Many of its models,Nexon, Punch, and Harrier, are among the top-selling ones in their respective categories. Due to these factors, theTata Motors share was in heavy demand during the last few months of 2021. 

However, a bout of profit booking began in the stock as the entire auto industry started facing a shortage of semiconductors. However, note that Tata Motors share price has been flattish over the past five years, underperforming the Nifty Auto index.The industry is still reeling under the shortage though the situation has improved. It is expected that it will get better from hereon. Moreover, Tata Motors still has a high debt, which can be a concern. The company says it aims to be net debt-free by FY24. 

Considering all these points, ICICIdirect, in its May 2022 commentary, retained BUY on a positive demand outlook, impressive margin, and free cash flow targets for FY23, and intent to be net debt-free. The broker set the target of Rs. 500 on the sum of the parts basis. It has rated India’s business at 10 times FY24E EV/EBITDA and JLR at three times FY24E EV/EBITDA. The broker has ascribed Rs. 160 value to its Indian EV business.

ICICIdirect believes key assumptions and triggers for future price performance will be:

-It expects a healthy 13.2% revenue CAGR over FY22-24 backed by a 15.8% total volume compound annual growth rate amid a strong order book at JLR (1.68 lakh units)

-Cost control, efficiency improvement-led free cash flow generation targets for the ongoing deleveraging push. The FY22 net automotive debt stood at Rs. 48,700 crore. 

-Continued EV alertness in India through concepts ad actual launches. Tata Motors is already a market leader with Nexon and plans to introduce 10 models by 2025. Jaguar all-electric by 2025, 6 BEVs in Land Rover in next five years

-Margins are expected at 14.3% in FY24, along with return on capital enterprises at 13.7% 

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