Tata Motors stock which had been cruising at 52-week high, took a beating on July 6 following an unexpected profit warning issued by the company. Volumes at Jaguar Land Rover could come under a cloud for the rest of the current quarter due to supply shortages of semiconductors which has only become worse. Tata Motors has already lost 30,000 units in the June quarter only preceded by a loss of 7,000 units in the March quarter.
Why is the Tata Motors stock down today?
Tata Motors issued a profit warning for the entire first half of the current financial year owing to the global shortages in semiconductors that could severely impact Jaguar Land Rover. Investors were spooked with the unexpected outlook sending the Tata Motors stock hit the lower circuit today before closing 8.41 percent down on the BSE compared to June 5.
The warning only amplified the cautionary note JLR issued in June which stated the chip shortage which impacted the April-June (Q1) quarter will spilled over to the July-September (Q2) quarter as well. This outlook went against the earlier guidance given by Tata Motors about improvement in availability of the chips form Q2 onwards.
Read: Tata Motors share price hits 10% lower circuit as company flags concerns over chip shortage
How big is the announcement and what’s its impact?
Tata Motors warned that the chip shortage could result in Jaguar Land Rover reporting 50 percent lower wholesale volumes by the end of Q2 than planned otherwise. To make it worse, both the British luxury brands expect ‘some level of shortages to continue through to the end of the year and beyond’.
These shortages, which are beyond the control of the company, will result in a cash outflow of about GBP 1 billion with a negative EBIT (earnings before interest and tax) margin for Q2. During Q1 JLR lost 30,000 units to the chip shortage on a wholesale of nearly 84,500 units (excluding the China JV). The company did not say how much sales is expected in Q2.
Why should Tata Motors investors worry?
Unlike JLR, at the standalone level Tata Motors’ own production has not been impacted so far due to the chip shortages. But the passenger vehicle division of the company generates minuscule revenue compared to JLR which has operation in the US, UK, Europe, China and other international markets. More than 80 percent of the Tata Motors’ revenues come from JLR.
Moreover, JLR recently launched the new Land Rover Defender and the refreshed Jaguar E-Pace. JLR presently has about 110,000 global retail orders, the highest in its history, representing three months of sales cover, with five months in Europe and four months in the UK. The chip shortages will only stretch the waiting period of JLR vehicles which is has hit 12 months.
What’s the way ahead?
Production at various factories owned by Mercedes-Benz, Audi and BMW, the three rivals of JLR, have been impacted since the last three months due to the shortage of chips costing them production loss. BMW on July 2 said that the shortage which has led to a loss of 30,000 units so far this year will lead to further loss production later in the year.
JLR today stated that new capacity of semiconductors will come on stream only in the next 12-18 months as investments for upping production has been made only recently. Global chip supplier Bosch has also warned of a continued shortage of semiconductor throughout the financial year.