Tata Motors (NS:) capped off a record year with a stellar performance in the fourth quarter, according to a recent report by Jefferies. The company’s Q4 EBITDA surged 33% year-over-year (YoY) and 11% quarter-over-quarter (QoQ), reaching new highs in line with Jefferies’ estimates. This robust growth was reflected across its segments, with EBITDA rising between 10% and 23% QoQ for Jaguar Land Rover (JLR) and India’s commercial and passenger vehicles (CV/PV). Additionally, Tata Motors significantly reduced its net automotive debt by 45% QoQ to a six-year low of INR 160 billion.

JLR continued to excel, posting a 12% YoY increase in wholesales and a 24% YoY rise in EBITDA. The EBITDA margin improved by 20 basis points QoQ to 16.3%. Higher-margin models like the Range Rover, Range Rover Sport, and Defender now constitute 55-60% of volumes and 76% of the order book, underscoring JLR’s robust business cycle.

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Despite challenges such as rising customer acquisition costs, JLR benefits from expanded capacity, lower chip costs, and material cost improvements. With an order backlog of 133,000 units, nearly three times the monthly volume, JLR is well-positioned for FY25. The company anticipates a flat EBIT margin YoY at 8.6% and aims for zero net debt in FY25, compared to £0.7 billion in FY24.

In India, the growth of the truck industry has slowed, with Tata projecting flat-to-slightly declining volumes for FY25, though Jefferies expects a 5% increase. Tata’s market share dipped to 47% in early FY24 but rebounded to 50% in the second half. The passenger vehicle market is also facing demand concerns, with Tata predicting less than 5% industry growth for FY25, although Jefferies forecasts 7%. Notably, Tata’s SUV segment, which accounts for 65-70% of its volumes, is expected to remain robust. The upcoming launch of the Curvv mid-sized SUV in late 2024 should provide a significant boost.

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Jefferies fine-tuned its estimates for Tata Motors, projecting FY25-26 EPS to be 12-14% above consensus. Over FY24-26, Jefferies anticipates a 13% CAGR in EBITDA and a 23% CAGR in EPS, with a net cash balance of $4.6 billion by FY26. Consequently, Jefferies maintains a ‘Buy’ rating on Tata Motors with a revised price target of INR 1,250, reflecting a 29.6% upside.

This optimistic outlook is underpinned by expectations of continued strong performance in JLR, moderate growth in India’s CV volumes, and a significant upswing in PV volumes and margins. Tata Motors remains well-placed to navigate industry challenges and leverage upcoming opportunities, making it a compelling investment choice in the automotive sector.

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But as usual, we will go to our favorite tool – InvestingPro to see what the stock is actually worth. Its fair value feature calculates the intrinsic value from various financial models to arrive at a more realistic value. In this case, a total of 14 models have been used to arrive at the fair value of INR 1,200, which is a decent upside potential of 24.5%, from the CMP of INR 964.5. This is almost in line with what Jefferies thinks in an ideal scenario.

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Read More: Decoding Stock Valuation: A Guide to Investing with Fair Value

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