Why Tata Motors shares are plunging today

What happened
Yet another automaker stock has fallen prey to the global chip shortage. Shares of Tata Engines (NYSE: TTM) are down today and were down 11% at 12:25 p.m. EDT. The Indian car leader was within reach of its 52-week high on the Indian National Stock Exchange (NSE) when an announcement from subsidiary Jaguar Land Rover (JLR) this morning sent the stock tumbling 8.5% at the closing of NSE.
Ironically, Tata Motors has just announced plans to raise passenger car prices for the second time in less than two months, but that’s not enough to offset the big hit JLR is about to take.
So what
First things first: JLR generated almost 78% of Tata Motors’ total revenue in the 2021 financial year, so any unfavorable development at the UK subsidiary is sure to hit the parent company hard.
Image source: Getty Images.
This morning JLR announced that it expects to report a negative profit before interest and tax (EBIT) margin and cash outflow of £1bn for the quarter ended June 30 despite a 68% increase in sales by retail. The global shortage of semiconductor chips that has brought the world automotive industry to a sudden stop is to blame.
Worse still, JLR expects chip supply constraints to worsen in the second quarter ending September, hit wholesale volumes by 50%, drive EBIT margin into negative territory and trigger another $1 billion. cash outflow books.
Tata Motors played down chip issues during its Fourth Quarter Quarterly Results Conference Call in May, when management said that while it expected supply to deteriorate in the first quarter, it saw things improve in the second quarter. Unsurprisingly, investors didn’t read much about the chip shortage and flocked to buy shares in Tata Motors, which had risen 19% since May before crashing today.
Now what
Although JLR expects the situation to improve in the second half of its fiscal year, investors may want to take this with a grain of salt, with major chipmakers warning the global chip shortage could take years to resolve and even with non-tech stocks feel the heat now.
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Neha Chamaria has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
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