Shares of Tata Motors Ltd have lost some steam in 2022, declining by around 13% so far in the year, even as, from a medium-term perspective, investors are sitting on handsome gains.

The auto sector is set to bear the brunt of elevated input cost pressures. The Russia-Ukraine conflict has led to a sharp rise in prices of key raw materials such as steel, aluminium. In particular for Tata Motors, its exposure to Europe through Jaguar Land Rover (JLR) has dented investor sentiment lately. The company has suppliers in Ukraine and current crisis may pose production challenges which would result in a delay in recovery of JLR volumes, note analysts at Kotak Institutional Equities in a report on 11 March. In this backdrop, volume expectations have been scaled down. Kotak’s analysts now expect JLR's UK volumes to rise 15-16% year-on-year (y-o-y) in FY23E compared to an earlier estimate of 34% y-o-y.

Note that in the nine-month period ended December (9MFY22), JLR contributed 70% to consolidated revenue from operations of Tata Motors. In the December quarter (Q3FY22), wholesale volumes, excluding those from joint ventures, fell 33% y-o-y, constrained by semiconductor shortage. However, demand remained strong with a record order book of 155,000 units.

Moving forward, higher metal prices are not the only worry. Stronger oil prices impact affordability, specifically in the commercial vehicle (CV) segment. Higher diesel prices would impact profitability of fleet operators if they are unable to fully pass on the burden to end consumers.

With JLR and the domestic CV business facing headwinds in the form of supply challenges and cost pressures, Kotak’s analysts have downgraded estimates. “We have cut our FY2023-24E consolidated Ebitda estimates by 7-25% led by (1) lower volume assumptions for domestic CV and JLR businesses and (2) 60-240 basis points cut in Ebitda margin assumptions. We have marginally cut our estimates for the domestic PV business given 45% of the domestic PV portfolio comes from the SUV segment, where demand impact may be limited" Ebitda is earnings before interest, tax, depreciation and amortization. One basis point is 0.01%.

What does offer some comfort is that Tata Motors is on a strong footing in the domestic passenger vehicle (PV) segment where the automaker has seen an expansion in market share. For instance in Q3, market share rose to 13% from 10% in Q1. The double-digit market share comes after a period of nine long years.

Meanwhile, amid rising oil prices, there could be an accelerated conversion to electric vehicles (EVs). Tata Motors holds the leading market share in EVs and could benefit from the same. In fact, this has been a key factor that boosted sentiments for the stock last year. The stock delivered stellar returns in 2021, appreciating as much as 162%, surpassing by a mile the Nifty Auto index, which gained by 19% in the same period.