Tata Motors rating “Buy”; the company managed the third quarter well despite the challenges
JLR achieved an EBITDA margin of 12% and a positive FCF; domestic CV margin likely to increase; “Buy” rating retained with revised TP of Rs 703
Despite limited wholesale volume of around 69,000 units (up around 10% YoY) due to a shortage of chips, JLR managed the T3FY22 quite well to focus on margin models higher as RR (39% mix, up 900 bps YoY) and deliver a better EBITDA margin of around 300 bps QoQ. at 12%. Thus, with limited investments (~£0.5bn) and improved profitability, JLR was able to generate a positive FCF of £164m and in turn help Tata Motors (TTMT) reduce automotive net debt from Rs 40 billion QoQ to Rs 600 billion. With the improvement in production, we expect the mix to normalize, leading to a rationalization of fulfillment and gross margin. Additionally, with improved production, we expect JLR’s working capital reversal opportunity of approximately £1.4 billion in FY23e.
In the domestic business, the CV margin (~2.6%) was strongly affected by the increase in the cost of raw materials despite the improvement in scale, compared to the adjusted Ebitda margin of the PV business which stands at 6.2%. We believe that TTMT would benefit from an upward cycle in CV (expect a CAGR of around 21% for the industry on FY22-FY25e), which would increase the margin. In domestic PV, TTMT achieved a high ten-year market share (Q3FY22: 13%) and is also a leader in electrification (EV market share of around 82%). Hold long with a revised target price of Rs 703 (was: Rs 653), implying 2.5x/12x JLR/standalone FY24e EV/Ebitda.
Key takeaways from the conference call: Management has indicated (i) a refocusing program to exceed the previous target of EUR 1 billion to achieve EUR 1.4 billion of savings in FY22 through a combination of performance market and investment savings; warranty spend reduced to 1.6% and targeted at
These would normalize with the increase in production and portfolio diversification to come. (iii) In the PV segment in India, over the next 5 years, the EV mix is expected to reach ~20% from ~6-8% now and diesel to drop to 10%, with gasoline and CNG at 50% , 20% respectively; (iv) The CV business in India is expected to improve its margin in the fourth quarter, thanks to stable steel prices and gradual delayed price increases. Although freight rates are firming and large fleet owners are increasing demand for CV, the industry cannot accept large price increases in a short period of time to remain neutral on gross margin; (v) PV adjusted for exceptional items (cost of spin-off of PV activity), reported an EBITDA margin of around 6.2% and should go further and reach around 8% in the fourth quarter itself; (vi) the company expects negative FCF of approximately £1.4 billion in FY22e for JLR, driven entirely by unfavorable working capital due to lower production. Maintaining a capex outlook of £2.5 billion for the 23rd financial year.
Financial Express is now on Telegram. Click here to join our channel and stay up to date with the latest Biz news and updates.