Though Tata Motors was biggest index loser (down 8 percent) on Friday reacting to Britain's decision to exit European Union and weak pound, analysts feel it is not so bad news for the auto major. Major analysts expect decline in pound to be positive for Tata Motors business over all.
The sterling suffered a record biggest one-day loss June 24 on Brexit concerns dragging it to the lowest level since 1985. The British currency tumbled 8.1 percent to USD 1.3679 on Friday.
However, analysts say that pound depreciation is positive for Tata Motors, which owns a British subsidiary Jaguar Land Rover, but the market is actually worried about demand impact.
Deutsche Bank says that 20 percent revenue exposure to Europe is partially offset by component imports. Infact it feels that 10 percent depreciation in the GBP/USD could lead to a 25-30 percent increase in the earnings of the global operations. However, this would be offset by negative translation impact as Tata Motors’ reporting currency is Indian rupee. Also, aggressive hedging by Tata Motors which results in a smaller immediate impact on the profit and loss compared to the actual currency move may create a bit of problem.
On a consolidated basis, around 40 percent of global revenues are denominated in USD while 20 percent are Chinese Yuan Renminbi (CNY)-led. UK and Europe individually contribute 20 percent to the global car volumes for Tata Motors and that is what is worrying market investors, says Deutsche Bank.
The brokerage firms states that the UK market constitutes around 12 percent of the sales of European original equipment manufacturer (OEMs) and hence any re-negotiations between the UK and EU might not necessarily be one-sided. As per its calculations, a 10 percent volume decline in UK and Europe volumes would lead to a 6 percent decline in earnings per share (EPS) for Tata Motors.
"In the event of a 10 percent depreciation of the GBP/USD and a 10 percent volume declinein UK and EU volumes, Tata Motors EPS would still rise by 12 percent. If the volume decline was 20 percent (and GBP depreciation 10 percent), the EPS increase would still be 7 percent. Relatively cautious stance on the company is due to concerns on mix deterioration as well as a weakening pricing environment in the global car market. Tata Motors currently trades at 4.5xFY17 40-50 percent premium to global peers such as BMW/Daimler," it says in a report.
Deutsche Bank has a hold rating on the stock.
JP Morgan is overweight on the stock with a view that a weaker currency and new production base in Europe will cushion against uncertainties. It is positive that as JLR is a net exporter, a weaker GBP will offset any potential impact on demand from UK over the near term. Also, JLR diversifying its production base by setting up a facility in Europe (Slovakia) de-risks its business model, the brokerage firm says. Another factors which are in favour of Tata Motors is its JLR benefitting from a new model cycle (XE, F Pace) and India business continues to benefit from a pick up in economic activity.
"As USD denominated exports account for over 50 percent of sales, JLR will benefit from the weakening currency. This will be partially offset by the net imports of 10 percent from Europe (exports to EU are 25 percent and imports are 35 percent)," it elaborates.
Macquarie also feels that the decline in stock price should be used as an opportunity to buy. With an outperform rating and a target price of Rs 535 per share, the brokerage says that JLR benefits from depreciation in sterling and it will likely more than offset the other negatives. JLR exports 78 percent of its cars manufactured in the UK to North America (21 percent), China (13 percent), Europe (26 percent) and rest of the world (19 percent).
"Assuming everything else remain the same, JLR’s revenue would increase by 5.7 percent and EBITDA by 26 percent if we factor in fall in GBP against various currencies. JLR can potentially use this benefit to either increase sales through higher incentives in USA or China or improve its operating margins," it says in a report. Jaguar Land Rover sales trend in China and USA will be key factors to watch out for.
However, it agrees that economic uncertainty and weak consumer confidence will be negative for the car demand. UK and EU markets accounted for 20 percent and 24 percent of JLR volumes in FY16, respectively.
Meanwhile, CIMB is still worried about the stock with a reduce rating and a target price of Rs 340 per share. It warns that concerns regarding currency and demand volatility will put the brakes on the share price rally that followed post-Q4 profit relief. The brokerage firm adds that sharp pound depreciation will be overall negative in the medium term as import costs and dollar debt outweigh.
Though it agrees that sales will benefit greatly from GBP depreciation as 57 percent of JLR’s sales is denominated in USD, especially to the USA, China and the Asia markets, CIMB says that net imports from European nations will be hit by the pound depreciation in the short term and tariffs in the medium term. It also fees that uncertainty in European car demand, with more EU members expected to follow the UK’s path, may have a bearing on the 23 percent of JLR sales derived from the region.Follow @NasrinzStory
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