Shares of Tata Motors, which have given more than 200 percent return in last 1 year compared to the 46 percent rally in Nifty50, hit a roadblock on July 6 after the company said that shortage of semiconductors may see Jaguar Land Rover report 50 percent lower wholesale volumes by the end of the September 2021 quarter coupled with a negative EBIT margin.
Reacting to the news, the Tata Motors stock closed 8.4 percent lower on the BSE. Experts feel that the structural story of this automobile player is still intact and dips can be used as a buying opportunity.
Also read: Tata Motors shares fall for 2nd straight day
“Based on the recent input from suppliers, we now expect chip supply shortages in the second quarter ended September 30, 2021, to be greater than in the first quarter potentially resulting in wholesale volumes about 50 percent lower than planned, although we are continuing to work to mitigate this,” Tata Motors said in a release.
The Road Ahead
The company expects the situation to start improving only in the second half of the financial year.
Tata Motors has been a marked outperformer in the last one year as shares spiked more than 200 percent from Rs 109 on July 6, 2020 to Rs 346 on July 5, 2021. The stock hit a fresh 52-week high of Rs 360.65 on the BSE on June 15 and since then it has been consolidating.
Jaguar Land Rover added that the broader underlying structural capacity issues would only be resolved as supplier investment in new capacities comes online over the next 12-18 months.
“JLR expects to report a negative Full cash flow (FCF) of 1 billion pound with a negative EBIT margin for 1QFY22,” Hemang Jani, Head Equity Strategist, Broking & Distribution, Motilal Oswal Financial Services said.
Free cash flow is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
“While the present supply constraints continue, the company will prioritise production of higher-margin vehicles for the chip supply available, and make chip and product specification changes where possible to reduce the impact,” he said.
While the first quarter of FY22 has been in line with expectations, the second quarter update from the company is a negative evolution, Jani said. But the brokerage maintains a 'Buy' rating on the stock.
Technical Outlook
The stock closed lower by over 8 percent on Tuesday which means that it is trading below the crucial short-term moving averages such as 5,10,20,50 and 100-Days Moving Average.
Technicals point towards some consolidation in the near term, but as long as it holds above Rs 280, dips can be used to buy, suggest experts.
“This counter seems to have reversed its course of action as it witnessed sharp fall from the intraday highs of Rs 358 levels to a low of Rs 311 thereby wiping out all the gains of last several days from the lows of Rs 326 in just one shot,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in said.
“However, historical observations suggest this kind of sharp single day falls on this counter only paved the way for sideways consolidation. Hence, in the next session if it manages to defend Rs 311, the near-term trend may slip into sideways hinting that corrections are only an opportunity to go long,” he said.
Mohammad further added that in case it breaches Rs 311 then on the downside strong support is seen around Rs 280 and unless that level is breached by bears this counter will not slip into a big downward spiral.
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