The risk-reward ratio of Tata Motors’ stock seems balanced at the moment.
The most important corporate event that affected Tata Motors’ shares in the last week was the spinoff of the company’s commercial vehicle (CV) division. Accounting will treat the demerger as if it happened on June 30, 2025. Currently, the listed stock only represents the domestic passenger car (PV) industry and Jaguar Land Rover (JLR). Investors who owned shares on October 14, the record date, will get one share in the spinoff company for each share they owned. Soon, the spun-off company should become public.
Tata Motors’ share price dropped from ₹661 to close at ₹396 on the record date to reflect the demerger, suggesting that the market is valuing the CV company at around ₹265 per share. Is it wise to buy in the shares now that the CV company has closed?
Tata Motors has remained range-bound at best since correcting from its all-time high in July 2024, while the stocks of competitors like Maruti Suzuki, Mahindra & Mahindra, and Hyundai have reached all-time highs in recent months. This mostly illustrates how, in a drab market, rivals have increased their market share but the firm has lagged behind in terms of volume growth. In terms of sales and profitability, its financials have also been bad. Although JLR’s prospects are not promising, the PV industry’s seems to have a mixed bag of prospects.
This justifies taking a cautious approach to valuation, and our SOTP (sum-of-the-parts) price of ₹420 reflects that. Because of this, the risk-reward ratio seems to be balanced at the moment, allowing current investors to stay onto their shares while avoiding new investments for the time being.
Tacks made of brass
Here is some background information before getting too deep. In terms of revenue before the demerger, Tata Motors was worth ₹4.4 lakh crore. It primarily consists of three companies: PVs, CVs, and JLR, which it bought in 2008. Additionally, it possessed Tata Motors Finance, a captive lending division that recently merged with Tata Capital.
About 71% of revenue goes to JLR, 17% to CVs, and 11% to PVs (based on FY25). JLR makes up around 73% of net profit (based on FY25 consolidated net profit from continuing activities before non-apportionable profits are taken into account), followed by CVs (24%), and PVs 3%.
According to FY25, JLR sells around 4.3 lakh units worldwide (including those from its Chinese joint venture with Chery), 3.85 lakh units from the CV arm, and 5.6 lakh units from the PV arm. About 30% of JLR volume (FY25) comes from North America, 19% from the UK and China (including joint ventures), 17% from Europe, and the remaining percentage from other regions. The table now includes a few more financial data points.
Performance in Q1
JLR: Revenue decreased 9% year over year in Q1 FY26, PBT (before extraordinary items) decreased 49%, and the EBIT margin decreased 490 basis points to 4%. The bigger problem has been an 11% drop in volume (15% including the China JV), even if repair costs and FX losses (caused by the pound’s rising versus the dollar) had an influence. Three factors combined—tariffs, the decommissioning of Jaguar’s portfolio, and decreased consumer demand—are to blame for this.
In order to avoid duties, JLR shipped more units to the US in Q4 FY25, before to the imposition of tariffs. As a result, sales were low this quarter since retailers had ample inventory. The main factor contributing to the decline in the EBIT margin was tariffs, namely the 27.5 percent duty rate. As a result of partially absorbing the cost of tariffs, which were made feasible by lower marketing expenses, JLR suffered a £254 million impact to its P&L (for comparison, FY25 EBIT was almost £2.5 billion).
The firm said in November 2024 that “Jaguar” will be completely rebranded as an EV-only brand. Production of all models has ceased, with the exception of one, pending the introduction of a new product. According to the management, this had a part in the drop in volume across Europe and the UK. Just 2.6% of all JLR wholesales (excluding the China joint venture) were Jaguar wholesales in Q1 FY26. In FY24, Jaguar was responsible for more than 12% of wholesale sales.
As a result, there was minimal opportunity for operational leverage and reduced output in an already dismal market scenario.
PV: In Q1, domestic passenger automobile sector volumes were unchanged, with the sub ₹10-lakh category seeing the most stress. The PV company’s revenue decreased by 8% as a result of a 10% drop in wholesales. The EBIT margin decreased to -2.8 percent from 0.3% in the first quarter of FY25. Lower manufacturing output is also to blame in this case since the corporation adjusted wholesale prices to avoid overstocking an existing excess inventory with dealers. Discounts and unfavorable commodity prices also had an effect on the EBIT margin.
Eleven percent of PV business volumes come from EVs. Due in major part to reductions and new launches by competitors, the company’s market share has decreased from 84% in FY23 to 37% now.
Prospects
JLR: The prognosis seems bleak for the future. In contrast to FY25’s EBIT margin projection of 8.5%, management has reduced it to a range of 5-7 percent.
Early in September, a cyberattack stopped operations. Production did not start up again until the end of September. A BBC investigation estimates that the issue will cost the firm around £50 million per week. Based on FY25, this might result in an approximate 8–10% (or £200 million) reduction to EBIT. In the second quarter of FY26, wholesales decreased by 24.2%. This makes it less probable that the business will reach the EBIT margin targets mentioned above.
Regarding tariffs, JLR exports to the US from Slovakia and the UK, where it is subject to EU and UK duties, respectively. They reduced tariffs from 27.5% to 10% on the UK and 15% on the EU. Although much lower currently, it is unclear whether this will have a positive effect on demand elasticity, particularly in light of the fact that tariffs were just 2.5% prior to the Trump administration’s imposition of them. The management anticipates a £500–600 million blow to the P&L for FY26, even with the reduced rates. Please take aware that JLR will not be covering all of the tariff fees. The aforementioned projection takes into account price increases that the firm has also disclosed.
China’s decision to impose a 10% luxury tax on cars costing more than RMB900,000 instead of RMB1,300,000 would also hurt sales.
PV: The future for the PV industry seems to be rather positive, even if the increased channel inventories may slow down sales. In September of FY26, the firm reported volume increase for the first time, and the advantages of GST rationalization would help it further. The new GST rates favor small automobiles, notably CNG cars, which are market sectors in which Tata Motors has a significant market share. The recently introduced facelifts for the Tiago and Altroz compact vehicles are already gaining a lot of popularity.
Sales of EVs are anticipated to be boosted by the new Harrier.ev, the current Nexon.ev, and the Curvv.ev (after the company’s announcement of a lifetime warranty). It seems like Sierra.ev will debut shortly.
The total of the components
This prognosis has led to the assignment of cautious multiples for the SOTP price computation. Global counterparts like Mercedes and BMW, which trade at 7-9 times trailing profits, are the basis for JLR’s 7x multiple. Because the markets these international OEMs service are often more developed and have less scope for expansion than India, their multiple is smaller than the 30-35x multiple that an Indian OEM enjoys. For example, from FY19 (prior to COVID) and FY25, JLR volume decreased at a CAGR of 3%, whilst the PV market in India expanded at a CAGR of 4%.
In India, both automobile penetration and replacement demand contribute to incremental volumes, although in developed countries, replacement demand often accounts for the majority of them. Furthermore, because of their pricing range, many international OEMs cater to a small market.
To account for Tata Motors’ lower EBITDA margin (7 percent in FY25) compared to rivals’ 12 to 20 percent, a cautious multiple of 25x is applied to the PV business.