Rising demand, better chip supplies powering TaMo's ride out of losses

Growing global and domestic demand, better semiconductor chip supplies, and softening commodity prices are powering the automotive manufacturer's ride out of losses

After seven tough quarters, Tata Motors is back on the road to profitability with the opening of global markets after the Covid-19 pandemic, an improvement in the supply of semiconductor chips, softening commodity prices, a revamp of the brand identity, and the launch of a series of successful products.

The company posted its first net profit after seven quarters of Rs 3,043 crore in the third quarter of 2022-23 (Q3FY23) against a net loss of Rs 1,451 crore in Q3 of FY22. About 67 per cent of Tata Motors’ revenues comes from its subsidiary Jaguar Land Rover (JLR) that is known for its top-end vehicles. JLR’s global retail sales jumped from 80,126 units in Q3FY22 to 84,827 units in Q3FY23.

“We did significantly improve our deliveries of MLA (Modular Longitudinal Architecture) units Range Rover and Range Rover Sport. They principally get targeted to North America and to China. North America was actually up 34 per cent quarter-over-quarter, and China was lower because of the Covid shutdowns,” Adrian Mardell, interim CEO, JLR, said during Q3 results call.

Things are looking brighter for JLR after China lifted strict lockdown controls in December 2022 following internal protests. “The actual uplift in China in the first three weeks of January is very strong. As those dealer outlets have opened, of course, the dealers have an appetite to take those units, and they’re moving very, very quickly. And that will be our anticipation post (Chinese) New Year also,” Mardell noted, adding that one of JLR's major priorities now is to “continue to secure chip supplies” through strategic tie-ups.

JLR's order book stands at record 215,000 units in Q3FY23 against 205,000 in Q3FY22, said Prabhudas Lilladher in its research note, adding that the 74 per cent of the current order book is for its new models like Range Rover, Range Rover Sport and Defender. "Production for these models is expected to increase in Q4 as well, as semiconductor supplies have improved," the note added.

Ravi Bhatia, president of automotive consultancy firm Jato Dynamics, told Business Standard that in the recent past, Covid was holding back JLR's business and the company has now benefitted from the opening up of the global economy. "Rich people became richer, so JLR benefitted as well," Bhatia said.

Meanwhile, parent company Tata Motors' passenger vehicle (PV) and electric vehicle (EV) divisions launched five new models in the last two years and they have turned out to be successful (see table).

Shailesh Chandra, managing director of the PV and EV divisions, told Business Standard that "strong growth" has been witnessed on the back of strong consumer connect, agile working to deal with semi-conductor crisis, and a holistic portfolio that is being appreciated for its high standards of safety, stylish design and modern features. 

Bhatia said that Tata Motors has very effectively changed the perception of its brand. "Today, it is considered a premium brand to have as compared to the earlier days of Indica and others," he added.

Secondly, Tata Motors effectively ran a campaign on safety and took a lead position on that issue. "When there was a perception of the Indian car market generally lacking in safety, they took a hard position on it and sent their cars to get NCAP (New Car Assessment Programme) certification. Today, if you talk to anyone about safe cars, they will name Tata Motors," Bhatia added.

The company's pole position in the SUV segment -- which is seeing the highest growth among all segments -- and the electric car segment -- which is also seeing substantial growth -- has also been a factor behind its turnaround.

All of this happened in FY23. In the first half of FY22, the company was number five in the utility vehicle (UV) segment, behind other major players such as Maruti, Hyundai, Mahindra & Mahindra and Kia. However, Tata Motors's UV sales jumped by 144 per cent to 181,481 units in the first half of FY23, making it the number one player in this segment. In electric cars, the company is the dominant player with about 85 per cent market share.

At the recently-concluded Auto Expo 2023, Tata Motors unveiled various PV and EV, which it would be launching in the next few years. Chandra said, “The Curvv (SUV) expected to enter the market first will be backed by our multiple powertrain strategy while the AVINYA (SUV) will be a pure EV, which depicts our interpretation of the future of mobility.”

To be sure, competition in these growing segments (EV plus SUV) will rev up too. Maruti will launch its first EV, which will be an SUV called eVX in FY24. Overall, India's largest carmaker will roll out six EVs in the country by FY30, its parent firm Suzuki said last month. Bhatia said Tata Motors in EV and SUV segments might change as Maruti and other brands also enter into the e-SUV segment.

Tata Motors produced 293,822 commercial vehicles (CVs) in April-December period last year against 246,515 units in the corresponding period of 2021. Tata Motors’ Executive Director Girish Wagh -- who looks after the company's CV division – said a strong focus on infrastructure spending by the government is expected to improve demand across segments and applications in the CV industry. The scrappage policy is also expected to be critical for the entire CV business, he said, adding that the company’s after-sales service is also a deciding factor for customers while choosing the company’s CVs.

“Critical sectors including e-commerce, FMCG, FMCD, construction, mining, steel and cement will continue to drive demand in the M&HCV (medium & heavy commercial vehicles) and I&LCV (intermediate and light commercial vehicle) segments. Similarly, the SCV (small commercial vehicles) segment is expected to grow on the back of resilient demand from the agriculture, dairy and e-commerce sectors. We expect a recovery for passenger CVs, with the reopening of offices and schools and increased activity in the tourism sector," Wagh added.

Overall, the company’s march towards profits in the coming quarters has more tailwinds than headwinds, according to sector analysts. 

In its research note, JM Financial said, “Softening raw material costs and operating leverage are expected to support margins going forward. Strong free cash flow generation is expected to support higher investments towards electrification at JLR,” it noted.

“Tata Motors’ EV portfolio is leading the domestic EV space. Improving margins for both domestic CV and PV segments augurs well for the overall profitability of the company,” it added.