Tata Motors puts pedal to the metal but margin, market share concerns remain

Tata Motors Ltd has laid out an aggressive road map for the next few years, aiming to jack up its market share on the back of new launches andsharper focus on electric vehicles (EVs), though more competition and margin pressure may throw a wrench in its plans.

In the domestic passenger vehicles (PV) business, Tata Motors plans to launch 5-6 new models, including four EVs, over the next two years starting with Curvv in FY25. The management expects India’s PV industry to touch 6 million units by FY30, a compound annual growth rate (CAGR) of 6%.

At its investor day event last week, the company said it plans to grow faster than the industry by improving its addressable market from 53% to 80% led by new car models (including mid-cycle refreshes) and powertrain options like EV and compressed natural gas (CNG). All these steps are geared towards increasing its market share from 14% now to 16% by FY27 and 18-20% by FY30.

Giving an update on the demerger of its commercial vehicle (CV) and PV business, Tata Motors said the NCLT scheme will be placed before the board for approval.

Tapping EV market

A key focus area for the company is the EV segment, where it commands a market share of over 70%. It looks to maintain leadership in the EV segment and achieve a 30% penetration of EVs in its portfolio by FY30. The management also plans Ebitda breakeven by FY26 driven by softening battery costs and growing economies of scale. Ebitda is earnings before interest, taxes, depreciation, and amortization

Of course, there is often a wide gulf between making plans and executing them.

Rivals in the race

For one, with rivals lining up a slew of launches in the EV space, Tata Motors will find it increasingly tough to hold on to its crown. Notably, Tata Motors’ EV market share slipped from 87% in FY22 to 84% in FY23 and 73% in FY24.

Same is the case with the overall PV market, where the company itself acknowledged “higher levels of competitive intensity".

Then there’s the question of margins. Tata Motors aims to push its Ebitda margin to over 10% for its PV + EV business in the medium-term led by better mix and higher operating leverage. But the buoyancy might be hard to replicate on a consolidated level, thanks to its cash cow Jaguar Land Rover (JLR)—which accounted for about 70% of its FY24 revenue.

Motilal Oswal Financial Services said in a report it expects JLR margins to remain stable over FY24-26, given rising cost pressure as it invests in measures to increase demand, and EV ramp-up, which is likely to be margin-dilutive. Even in the India business, both CV and PV businesses are seeing moderation in demand, the report said. The brokerage mentions the above-mentioned headwinds could hurt future performance after Tata Motors delivered an extremely robust performance across key segments in FY24.

In the domestic CV space, Tata Motors sees volumes growing at 4-5% CAGR during FY24-29 on the back of robust GDP growth, the government’s thrust on infrastructure development, and vehicle scrappage policy.

Targeting strong double-digit margins

Overall, it is targeting strong double-digit margins and healthy free cash flow generation.“While CV profitability is likely to remain healthy, we continue to monitor volume in the near term as it has peaked compared to the FY19 levels. We are impressed by Tata Motors’ robust EV portfolio, resulting in a better customer profile than internal combustion engine (ICE) vehicles (~25% first-time buyers and ~22% female customers). We await details on JLR at its analyst meet on 19 June in the UK," analysts at Elara Capital said.

That said, many analysts feel the stock’s strong run over the past year (up 74%) has capped the sharp upsides in the near term.

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