Tata Motors Faces 'Sell' Rating from Motilal Oswal Amid JLR Woes and Margin Pressure

Leading brokerage firm Motilal Oswal has turned cautious on Tata Motors, initiating coverage on its demerged passenger vehicles (PV) business with a 'Sell' rating and a target price of Rs 312, indicating a potential 20% drop from current levels. This downgrade is primarily driven by significant challenges faced by Jaguar Land Rover (JLR), the company's luxury vehicle division.

Key Reasons for Caution:

1. JLR's Sharp Quarterly Slide: JLR reported a consolidated loss of Rs 55,000 crore, largely due to its weak earnings. The division's EBITDA margin fell to -1.6%, a multi-year low. Management has also significantly lowered its FY26 EBIT margin guidance to 0–2% and Free Cash Flow (FCF) expectations to GBP -2.2 billion to -2.5 billion.

2. Global Demand Weakness Impacting JLR: Soft demand in key markets like China, the US, and Europe is expected to keep operating costs elevated. Tariffs in the US and luxury taxes in China are also anticipated to have a structural impact on JLR's medium-term profitability. Motilal Oswal now forecasts JLR's FY26 EBIT margin at 2%, with only a gradual improvement to 5% by FY28.

3. Production Loss and Cyber Incident: A cyber incident led to an estimated production loss of around 20,000 units in Q2, with an additional 30,000 units expected to be impacted in Q3. This production hit, combined with rising pricing pressure, higher discounting, increased warranty costs, and US tariffs, is squeezing JLR's margins.

4. India PV Business Stable but Insufficient: While Tata Motors' domestic PV business is performing in line with expectations, it represents a smaller portion of the overall valuation and cannot compensate for the severe deterioration at JLR. The brokerage maintained its valuation for the PV business but lowered the multiple for JLR.

5. Management Expectations: The company anticipates the domestic PV industry to grow in the mid-single digits for FY26, supported by new models and potential price hikes. However, PV ICE (Internal Combustion Engine) profitability is expected to remain muted for another quarter due to competitive pricing and commodity inflation. Discounts are likely to ease in Q4.

Impact

This news directly impacts the stock price of Tata Motors, potentially leading to a sell-off as investors react to the downgrade and revised outlook. It highlights significant operational and market challenges for JLR, which could affect the company's overall financial health and investor sentiment in the Indian stock market. The target price set by Motilal Oswal suggests considerable downside risk for the stock. The rating is a 'Sell' with a target price of Rs 312, an impact rating of 8/10 for Indian investors.

Definitions

• EBITDA Margin: Earnings Before Interest, Taxes, Depreciation, and Amortization margin. It measures a company's operating profitability before accounting for non-operating expenses and capital charges.
• EBIT: Earnings Before Interest and Taxes. It represents a company's profit before accounting for interest expenses and income taxes.
• FCF: Free Cash Flow. It is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
• PV: Passenger Vehicles. Cars and other vehicles designed primarily for carrying passengers.
• ICE: Internal Combustion Engine. A type of engine that burns fuel to produce power.
• SoTP-based TP: Sum of the Entirety-based Target Price. A valuation method where different business segments of a company are valued individually, and then their values are added up to arrive at the total target price for the company.