While highlighting how the weight of the auto sector has declined over the recent years, going forward you expect that to rise. Tell me which stocks do you think are going to lead this recovery?
If we see the stocks which have been impacted because of these cyclical issues, primarily on the largecap side we have seen M&M which initially got impacted has now seen a spectacular renewal from last two years or so. We do believe that it will continue to do well, particularly given their strong SUV order book. But more importantly, stocks like Tata Motors, Ashok Leyland where we are seeing a good cyclical recovery in India particularly on the commercial vehicle side and passenger vehicle side are right at the bottom and as supply side improves, Tata Motors should also see a good recovery driven by JLR, not to mention the recent announcement for IPO of Tata Technologies that will add to the SOTP value between Rs 25 to Rs 45 a share that could be near-term trigger for Tata Motors as a stock.
Similarly, Ashok Leyland, as I said, the stock has been consolidating for the last few months at current level. Business has been improving at a very fast pace. Market share recovery has been strong. Margins are just recovering. So that is another stock which we like on the OEM side.
But tell me when you talk about Tata Motors, you think it is JLR or the domestic business which is going to aid the recovery?
The large part of delta from here will be by JLR. The India business has been doing well. We expect that to continue to improve, but the key driver will be JLR.
JLR will improve. I mean, they are still struggling with chip shortages. What I also understand is that there is no large product pipeline, at least for JLR portfolio per se, and every time when there is a new product pipeline, the customer migrates from old to new. So why should JLR turnaround when world is in a mess?
Clearly the macro headwinds which you are referring to is clearly area to be monitored. But as things stand, JLR has three major products, primarily Range Rover, Range Rover Sport and Defender which have been recently fully upgraded, that in turn is resulting in very strong order book in just three markets which represents 60% of their volumes. They have order book of 215,000 units, of it 75% comes from these three recently upgraded models.
Demand continues to remain strong. And the chip supply which has been the big drag on performance is slowly improving.
Our 3Q FY23 was a quarter of new high in terms of production post chip shortages. Fourth quarter should do better on 3Q and gradually things are improving on the chip supply side as well. While we are nowhere near to normalcy from the weak period of our last 12 months, things are slowly falling back in place. That supported with a very strong mix along with the operating leverage benefit, we will see substantial improvement in JLR’s P&L as well as balance sheet.
In fact, we expect JLR’s net debt to reduce from close to 4 billion pounds as of December 22 to little over 1 billion pound by March 25 led by improving supplies, better mix and in turn improving margins.
If the subsidiary of Tata Motors which is Tata Tech if it goes public later this year, what could be the impact of that?
Currently we are not giving any value to Tata Technologies as a part of our SOTP, that business is a strong business focussed on ER&D space based on the valuations at which that subsidiaries expected to come up with IPO along with the valuations which are traded in the unlisted market. We estimate per share value of about Rs 25 to Rs 45 a share for Tata Motors after 20% holdco discount, so that could be a good near-term re-rating catalyst for Tata Motors as a stock.