Tata Motors tumbles 22% post US downgrade

Our Bureau Chennai | Updated on August 24, 2011



Global uncertainty, rate hike trigger downswing

The stock of Tata Motors has been at the receiving end and has become one of the major underperformers since S&P downgraded the US. The stock closed at Rs 695.55, just a shade above year-low Rs 700.75 on the NSE.

The stock crashed 22 per cent since August 6 — the day the US was downgraded. During the same period, the NSE's S&P CNX Nifty fell by six per cent.

The decline has also been accompanied by increase in traded volumes. Today's trading volume of 6.7 lakh shares on the BSE is higher than the two-week average of 5.9 lakh shares.

Varied reasons

According to the head of a research firm in Mumbai, while the rate hike has weakened the Tata Motors stock initially, uncertain global outlook and downward trend of margins, due to rising input costs have aggravated the slide.

According to analysts, the stock has been on the downswing as several brokerages have revised the target price downwards following global economic concern, particularly in the Euro region.

“We lower our earnings estimates to reflect a potential demand slowdown but MS economists do not expect a prolonged developed world recession. At current levels, the stock is pricing in sharp de-growth in earnings for JLR, which, in our view, is a low probability; thus the risk-reward looks favourable at current levels,” said a Morgan Stanley research report.

Religare, on the other hand, downgraded the stock to ‘Hold' from ‘Buy'. “Though we viewed the launch of the Evoque as the next stock catalyst, this could be overshadowed by near-term macro/growth concerns in JLR's key markets. We cut our volume growth estimates for JLR for FY12/FY13,” said a Religare Research Report.

However, some feel that the fall is overdone.

“The stock has corrected 35 per cent over the past six months. Given the current price, we believe the market seems to be factoring in an overly pessimistic scenario (no volume growth for JLR until FY-13 and earnings erosion of 65 per cent),” said Standard Chartered analysts, Mr Amit Kasat and Mr Aniket Mhatre, in a recent research report.

“Tata Motors is trading at bear cycle valuations of 5x FY13E PE and 3x FY13E EV/EBITDA. Even on P/B vs RoE (1.4x vs 30 per cent return), the stock appears attractively valued,” said Standard Chartered.

Published on August 24, 2011

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