Tata Motors is expected to see a strong recovery in volume and significant improvement in free cash flow generation for the JLR business, which may have contributed to its outperformance in the market. The domestic passenger vehicles and CV segments have been doing well and may constitute 50% of the company’s value. Meanwhile, the pharma sector is bottoming out, and technical experts predict a better risk-reward long-term perspective. Domestic sales data have turned out encouraging, and some of the preferred picks within the space in the large caps are Sun Pharma and Divi’s.
Siddhartha Khemka, V-P, head of Research (Retail), MOFSL, says the latest updates from Tata Motors’ JLR segment is pointing to a strong recovery in its volumes. That apart, the company has also started showing strong improvement in free cash flow generation for the JLR business – about 500 million pounds for Q3. They had earlier indicated that Q4 would be about less than that. But now they have come and said that the Q4 free cash flow generation would be about 800 million pounds and with that, for the full year they are going to be free cash flow positive.
Let us begin with the IT pack itself. The expectations were a bit muted given that it is going to be a seasonally weak quarter but a growth slowdown as well is expected in FY24. Do you think that is priced in completely?
Within the IT pack, growth has definitely come down but on the other hand, we are seeing that cross currency is supportive. That is a tailwind and the cost pressures are easing off, attrition has come down and employee cost has come down as well. So, overall, it would be a decent quarter.
The outlook is very crucial, given that BFSI constitutes a larger portion for the Indian IT services and the recent developments in some of these European and US banks would have raised concerns about the spending intensity in the BFSI sector as a whole. Definitely, that will be the key thing to watch out for while TCS does not give a direct guidance, Infosys would do that tomorrow and that will be something the entire street would be watching out for. But definitely the tone would be set today with TCS announcing their numbers and having the interaction post which we will get to understand the current environment much better.
Maruti is down, Tata Motors is up. Market share of Maruti has gone down from 55 to 45, Tata Motors has gone up from 5 to 15. Why is Tata Motors is outperforming? Their market share in the domestic car market is increasing. JLR has stabilised and our markets are much more confident about it.
Tata Motors has three specific business segments. One is the domestic passenger vehicles segment which has been doing well for the last couple of years both on the SUV side as well as on the EV vehicle side. The other business is the CVs on the domestic side and the biggest of all was the JLR business. If one looks at what is happening, with the industrial capex cycle improving, the CV cycle is also looking up on the domestic side.
The latest updates that are coming in from the JLR is also pointing to a strong recovery in the volumes for JLR. That apart, the company has also started showing strong improvement in free cash flow generation for the JLR business. Q3 – about 500 million pounds. They had earlier indicated that Q4 would be about less than that. But now they have come and said that the Q4 free cash flow generation would be about 800 million pounds and with that, for the full year they are going to be a free cash flow positive of about 800 million. That is being largely contributed by the last two quarters of free cash flow.
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These points are making the market very positive on Tata Motors. All the three engines are firing and supporting the stock price having not participated in the recent past. The valuations also look comfortable. But definitely, the domestic business is something that is driving from earlier SOTP value of only 20%. Now we are expecting almost 50% of the value coming from the domestic business for Tata Motors. So that is definitely working in favour of Tata Motors.
But talking about the entire pharma space, what is the top bet within the sector?
Technical experts are suggesting that the pharma sector is bottoming out. Even if one looks at it from a results perspective, after three quarters of decline, finally we are expecting this quarter, the overall coverage stocks under pharma, under the healthcare space, to report a 9% growth in earnings. Although that by itself looks modest, one has to keep in mind that in the last three quarters, there has been a decline in net profit.
So things are improving gradually. Apart from that, the number of cases that are going up definitely is a cause of concern. I think that is also leading to some interest in the pharma space. The domestic sales data that came in for March was encouraging. Now, the data for exports have also come in for some companies and that looks encouraging.
Overall, the space offers a better risk reward, although the near-term outlook is not very strong. So, there could be one or two more quarters of pain. Definitely short-term traders and investors may look away, but from a long-term perspective, risk reward looks favourable.
Some of our preferred picks within the space in the large caps is Sun Pharma, which is our preferred pick there. Divi’s is another that we like within the pharma space. But Sun Pharma would be a preferred pick within the pharma space.
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