On Tuesday afternoon, Tata Motors Ltd shares were cruising along near their 52-week highs, as if problems like the chip shortage were minor speed bumps. But investors were certain a rude shock when the corporate issued a profit warning for not only Q1FY22 but also for Q2FY22.
Tata Motors shares fell 12% from their intra-day highs soon after the stock exchanges published the profit warning. In absolute terms, it amounted to a $1.9 billion hit on the firm’s market capitalisation .
It said the cash balance at Jaguar Land Rover stood at £3.7 billion at the top of Q1, down from £4.8 billion in end-March. the huge cash outflow was largely thanks to the chip supply constraints, which hit production by about 30% in Q1. What’s more, it said the chip shortage is worsening, which can hit production volumes by about 50% and cause operating cash outflow of about £1 billion within the September quarter. In all, cash outflow within the half of the year is estimated at $2.9 billion, something that investors evidently didn’t see coming.
The pandemic has caused a worldwide shortage of semiconductor chips, due to a surge in demand for electronic goods.
In mid-May, consulting company AlixPartners had said the semiconductor chip shortage is predicted to cost the worldwide industry $110 billion in revenue in 2021.
Indeed, Tata Motors had been talking about the chip shortage for a short time and mentioned during a call in mid-May that things had worsened in Q1. But the view on the road seemed to be that this is able to only impact demand within the near term, and recoup later.
“The present global supply shortage of semiconductor chips would impact production and sales volumes. However, supply constraints would ease in 2HFY22 as new capacity comes online. As a result, most of the lost production would be recovered once the availability of semiconductor chips improves,” analysts at Motilal Oswal had said during a mid-June note to clients.
Tata Motors said the shortages can last for much longer. “We expect things will start to enhance within the last half of our fiscal year. However, the broader underlying structural capacity issues will only be resolved as supplier investment in new capacities comes online over subsequent 12-18 months then we expect some level of shortages will continue through to the top of the year and beyond,” it said.
The sharp and sudden decline within the firm’s shares may be an exemplar of the exuberance within the stock markets, with investors ignoring near-term concerns over earnings, and depending on long-term prospects.