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Understanding the 20% rise in Tata Motors shares this week

 


The shares of Tata Motors Ltd are on a roll. After closing 11% higher on the NSE on Monday, stocks’ stellar run continued on Tuesday as well and rose 10%, hitting a new 52 week high. One of the reasons for the optimism could be the buzz that the company is considering partnering with Tesla to manufacture and sell its vehicles using Tatas facilities. But reports also said that a spokesperson for Tata Motors denied such a development.

The strong appreciation in Tata Motors shares this week also means the stock is around 20% higher than its pre-covid highs seen in January 2020. In fact, at the current market price of 242 each, the stock is up 270% from its 2020 low seen on April 3.

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There are some factors that contribute to the optimism of the Tata Motors share. On Monday, overseas subsidiary Jaguar Land Rover (JLR) announced sales figures for the quarter ending in December, which show a sequential recovery despite the covid-19 pandemic. It is a good thing. Retail sales of JLRs were up 13% from the September quarter, although sales were down 9% on an annual basis. Basudeb Banerjee, Automotive Analyst at Ambit Capital, said: The latest figures from Jaguar Land Rover are encouraging and indicate a more than 30% increase in wholesale sales, thanks to tighter inventory control in the last quarter, this which will also support higher margins. “

According to another analyst requesting anonymity, there is momentum in the stock now and the market is generously rewarding additional good news. As such, shares of Ashok Leyland Ltd also hit a new 52 week high on Tuesday. Ashok Leyland is expected to benefit. A better than expected recovery in the medium and heavy commercial vehicle segment, underway .

The improved business outlook for Tata Motors is also contributing to feelings for the action. Basudeb Banerjee points out: Over the past 2-3 months, truck sales have improved sequentially. Trucks are a relatively better margin business and improved volumes bode well for the margin outlook aided by cost reduction initiatives. Ultimately, this would support Tata Motors’ transition to positive free cash flow on a stand-alone basis, where it was currently negative. In addition, positive announcements for the automotive sector are expected in the next budget, after waiting over a year. “

Overall, Tata Motors is also on a deleveraging path. ICICI Direct Research said in a report last month that it plans to reduce auto debt to near zero levels in the next few years (around 48,000 crore from FY20) and be positive free cash flow from FY22E, which we believe will drive value creation for its shareholders. “

It goes without saying that disappointments or delays on this front can come as a sharp shock to investors, as can a slowing recovery in sales.

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