The street seems to be a bit surprised by the free cash flow generation which is expected to be 400 million pounds in Q3 for Tata Mores and this comes when there was a negative FCF of almost 784 British Pounds in the first half of the year. Do you expect the company to beat their own guidance as far as the free cash flow is concerned and is the move on the stock today warranted?
Yes, that is a very important parameter, in fact, that is the positive surprise. Volumes were marginally higher than expectation or broadly in line but this free cash flow of 400 million plus is certainly indicating that there would be a decent margin improvement. Also apart from this volume uptick, there could be better product mix, geography mix which would result into better profitability this time and then only it can turn this positive cash flow, otherwise volume improvement is relatively much lower on a sequential basis.
So this also indicates that directionally now company has started moving into the right direction in terms of the profitability and cash flow apart from volume uptick as for volume there is order book pending of more than 2,15,000.
There is no question related to the demand situation for next two-three quarters as there are supply side constraints impacting but despite all this adverse situation company’s profitability will improve in Q3 and interestingly semiconductor issue also seems to be now slowly getting much better.
Looking at this guidance coming in Q3 overall impacting the full year FY23 free cash flow guidance, what kind of an upside risk do you see on the back of that and given the fact that you said that now semiconductor issues are behind this positive news with respect to free cash flow are you upping your target price or revising your guidance on ?
We would not change our target price based on this news. We would wait for more clarity in terms of the detailed financials, once the results would be out then we would revisit our estimates. We have buy recommendation and our target price, SOTP based target price already at Rs 575 which is a sizable upside from the current level. So that is why we remain positive on the stock and we believe that going forward the situation is improving in other countries as company has highlighted in geographical mix. China has declined because of the COVID despite that company was able to record these volumes. So if China again starts improving, then volume would be much better so those type of numbers we would see in coming two-three quarters.
Can you explain to us and to our viewers that today when we see this stock higher by 6%, what is it based on because the larger part of the story does not change for Tata Motors, when it is going to be debt-free, the cash flow projections it has provided for all the way till FY25?
This 6% to 7% upside today that is a positive reaction, of course, after this news but we have to understand that this stock has underperformed largely in last two-three quarters and stock valuations, stock price in absolute terms has come to a level where everything gets captured. All this negativity gets captured and the risk reward becomes favourable.
So Street investors were waiting for one decent positive trigger for the stock’s upside and till now all the triggers, all the news everything was negative and in previous commentary, company indicated that because of the supply shortage our volume would be much lower. This is the first time they started giving positive surprise or beating their own estimates either in terms of volumes or cash flow or profitability. So Street was waiting for any one such major positive trigger for JLR particularly. Domestic business was already in a good shape since last two-three years and it has been consistently gaining market share on PVs or EV or even CV but JLR was a major issue which now started seems to be getting resolved to some extent.
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