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On Wednesday, BofA Securities analyst Gunjan Prithyani increased the price target on Tata Motors Ltd (NSE:TAMO). (TTMT:IN) to INR740 from INR655, while keeping a Neutral rating on the stock. The adjustment follows Tata Motors (NYSE:TTM)’ recent financial results, which showed a substantial quarter-over-quarter improvement in the company’s performance.
Tata Motors’ Jaguar Land Rover (JLR) division reported an EBIT margin of 10.7% for the fourth quarter of the fiscal year 2025, a 1.6 percentage point increase from the previous quarter. The company also generated a free cash flow (FCF) of £1.4 billion, resulting in a net cash balance sheet. The improvements were attributed to better operating leverage and the release of working capital.
In his analysis, Prithyani pointed out several factors contributing to the margin beat. These included a lower depreciation charge in the fourth quarter, which was £350 million compared to £500 million in the first quarter, due to the rundown of Jaguar models and the extension of the lifecycle of internal combustion engine models. Additionally, there was a sharp 9% quarter-over-quarter decrease in other expenses, despite a 7% increase in volumes. However, Prithyani noted that the sustainability of these reductions needs to be monitored.
Despite the positive outcomes, Tata Motors faced challenges such as a 3% quarter-over-quarter decrease in average realizations, reflecting a dilution in the mix and an increase in variable marketing expense (VME) to 5%, up from 4.2% in the third quarter and 2.5% in fiscal 2024. The gross margin also saw a 70 basis point decline from the previous quarter.
Management at Tata Motors decided to postpone updating their fiscal year 2026 guidance until the Investor Day scheduled for June 16. The analyst also brought attention to the impact of trade dynamics, particularly the UK-US trade deal, which is beneficial considering the US accounts for a third of JLR’s volumes. However, tariffs for exports from the UK and EU, which represent 30% of production, remain high, with the UK facing a 10% tariff compared to the previous 2.5%, and the EU at 25%. Tata Motors has implemented certain mitigation measures, including reduced VME programs, but concerns regarding soft demand, the aging model cycle, and competitive intensity are expected to pressure margins moving forward.
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