Buy Tata Motors Ltd for the Target Rs 700 by Emkay Global Financial Services Ltd
Tata Motors (TMCV) posted healthy 1Q volume growth of 26% yoy which was offset by a 3.5% qoq dip in ASPs (mainly owing to lower MHCV trucks mix of 36% vs 44% in 4QFY26) leading to overall revenue growth of 23% yoy. This coupled with rising commodity pressures (steel, rubber) led to gross margin (GM) compression leading to EBITDA miss by 15% to 11.3% (Emkay: 12.5%). Management remains constructive on the demand outlook, with July growth described as healthy and expectations of double-digit growth in 2Q, supported by robust freight activity and growth in e-way bills; but it did not give any 2HFY27 growth guidance. E-CV momentum remains strong (E-CV volumes up 277% yoy; SCV EV penetration at ~10%); however, battery cell availability remains a key constraint. TMCV is also confident of passing on the ~2.5% price hike taken in July which should help offset the continued commodity inflation. We keep our EPS largely unchanged, as healthy demand, EV momentum, and price pass-through should balance out near-term margin pressure. We maintain BUY and TP of Rs700, based on 14x Jun-28E EV/EBITDA for the SA business.
Robust 1Q demand with higher RM/employee costs creating a margin drag
TMCV reported a strong 1Q, with revenue up 23% yoy at Rs193.3bn (Street/Emkay estimates at Rs203bn/Rs205bn) owing to a strong 26% yoy volume growth offset by 3.5% qoq ASP decline; EBITDA missed our estimates by ~15% (EBITDAM at 11.3% vs Emkay estimate of 12.5%) mainly due to lower GM and higher-than-expected employee costs. Adjusted PAT was up 15% yoy to Rs16.3bn.
Earnings call KTAs
1) Management remains constructive on the domestic CV demand front, with July growth seen as promising, with expectations of healthy double-digit growth in 2Q; however, it refrained from giving a specific 2H growth outlook. That said, demand is being aided by healthy freight activity, strong e-way bill generation (+12.4% yoy in 1QFY27), and resilient FASTag collections.
2) E-CV volumes grew 277% yoy in 1Q, aided by improving TCO parity vs ICE, higher diesel prices, and new product launches. While demand for EVs remains healthy, battery cell availability and lead times have emerged as a near-term bottleneck.
3) TMCV has already taken multiple price increases, with further ~2.5% increase effective 1-Jul (confident of entirely passing it on).
4) The company is seeing good market acceptance for higher-payload trucks. Sheet metal, castings, and forgings have become constraints amid the demand recovery, with the company undertaking targeted debottlenecking to improve throughput.
5) Deliveries in Indonesia have commenced and are expected to ramp up significantly over FY27–28 (indicated that ~70k orders are expected to be supplied over FY27–28). Beyond Indonesia, the company is also exploring opportunities across Africa, SAARC, and other international markets, including LCV and new product categories.
6) Regulatory approvals for the Iveco transaction are now at the final stage, with only one approval pending. Management expects final clearance by end Aug-26, following which the tender offer is expected to be launched in early Sep-26 and the transaction expected to close by early Nov-26.
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