Tata Motors share price: Why Kotak retained 'Sell' rating on Tata group stock

Kotak Institutional Equities has maintained its 'Sell' rating on Tata Motors, setting a fair value target of Rs 600. This decision follows a comprehensive review of the Jaguar Land Rover (JLR) annual report for FY2025, highlighting significant challenges faced by the company's subsidiary. The report underscores JLR's struggle with competitive pressures in key markets and notes a potential impact from tariffs that is not fully accounted for in the company's financial estimates for FY2026-27.

"We believe tariffs can have significant impact on the company’s FY2026-27E financials, which is not completely factored in. In addition, underperformance in the domestic business coupled with muted demand environment remains another area of concern at the current juncture," Kotak said.

The domestic brokerage explained that the near-term to remain challenging for the JLR business, owing to weak demand trends in China and tariff impact in the US. Additionally, market share loss in domestic CV and PV businesses remains an area of concern.

A notable financial development for JLR in FY2025 was the substantial increase in its net derivative financial assets, which rose from GBP 61 million in FY2024 to GBP 473 million. Furthermore, the defined benefit obligation related to pension payments fell to GBP 4.7 billion, with the pension plan remaining overfunded by GBP 291 million in FY2024, Kotak Institutional Equities said.

JLR's exposure to foreign currency liabilities remains significant, with GBP 1.7 billion in USD and GBP 2.4 billion in EUR, in addition to GBP 137 million in Chinese Yuan. These currency exposures present an ongoing risk, particularly in light of fluctuating global markets and potential tariff implications. 

"As of FY2025, JLR holds net foreign currency liabilities in USD (GBP1.7 bn) and EUR (GBP2.4 bn) with smaller exposure in the Chinese Yuan (GBP137 mn). This indicates that JLR owes more in these currencies than it holds in financial assets. A 10 per cent appreciation in USD/EUR would lead to pre-tax loss of GBP171-240 mn, driven by revaluation of liabilities exceeding gains on assets. While these exposures are expected to largely hedged through derivate contracts; however, movement in currency may impact reported earnings or other comprehensive income," Kotak said.

Meanwhile, the performance of JLR's premium SUV segment showed a positive trend, with Range Rover and Defender models contributing 85 per cent of total sales in FY2025, up from 79 per cent in FY2024. However, despite this growth, JLR is lagging behind its peers in the battery electric vehicle (BEV) market. BEV volumes comprised only 2 per cent of JLR's sales, compared to 10-22 per cent for premium original equipment manufacturers (OEMs) in CY2024.

JLR's financials were further strained by its joint venture in China, which reported a net loss of GBP 14 million in FY2025, a downturn from a GBP 36 million profit in FY2024. This decline is attributed to increased competitive intensity in the Chinese market, which remains a critical area of focus for JLR's future growth strategies.

The company's Ebitda margin decreased by 160 basis points year-on-year to 14.3 per cent in FY2025, primarily due to higher employee costs, increased vehicle margin expenses, and warranty costs. This was partially offset by favourable product mix adjustments and hedge gains. The free cash flow generated decreased to GBP 1.5 billion from GBP 2.3 billion in FY2024, affected by weaker operating cash flow and higher investment levels.

Kotak has raised concerns about JLR's underperformance in the domestic market, coupled with a muted demand environment. These factors, alongside anticipated tariff impacts, pose substantial risks to the company's financial outlook. Nevertheless, the report acknowledges that JLR has turned net cash in FY2025, providing some resilience against near-term financial pressures.

The emphasis on strengthening JLR's position in both the premium SUV and BEV markets will be crucial as the company aims to enhance its competitive edge and financial stability in the coming years, Kotak said.