Tata Motors - 3QFY23 Result Update - 

     Strong Recovery at JLR on Track; Attractive Valuation

TATA MOTORS

Tata Motors (TTMT) has recorded strong performance with EBITDA margin coming in at 10.9% vs. our estimate of 10% in 3QFY23. Consolidated revenue grew by 23% YoY (up 11% QoQ) to Rs884bn, vs. our estimate of Rs843bn, better than expected due to better realization at JLR. Consolidated EBITDA grew by 43% YoY (up 56% QoQ) to Rs96.4bn, vs. our estimate of Rs84.1bn due to better margins at India operations and strong operating profit at JLR. EBIDTA margin expanded by 153bps YoY and 311bps QoQ to 10.9%, vs. our estimate of 10%, primarily due to lower other expenses and declining RM cost. Other exp/sales fell 183bps YoY/177bps QoQ to 14.5% and RM/Sales declined 113bps QoQ to 64.9%. JLR’s EBITDA margin of 11.9% (down 8bps YoY and up 161bps QoQ) was 22bps lower than our estimates of 12.1%, while standalone EBITDA margins were jumped strongly by 635bps YoY and 443bps QoQ to 8.8%, supporting consolidated performance. TTMT reported PAT of Rs29.5bn and Adj net PAT of Rs17.8bn (adjusted for exceptional forex gain of Rs11.7bn) vs. our estimated PAT of Rs4.7bn, also supported by higher non-operating income. Going forward in FY24E, we expect situation would normalize with softening in commodity prices, normalized inflation level and ease on semiconductor availability. Moreover, JLR’s strong order book of over 215K units would result into strong volumes in FY24E. We believe lower capex and improvement in supply of semiconductor would support JLR, while improving PV business, delayed lower RM cost benefit and focus on cost control would improve TTMT’s standalone margins. Moreover, tight control on capex and R&D would lower its automotive debt to greater extent over the next 2-3 years. We believe that despite near term challenges, structural improvement across the segments are on track. In view of expected recovery of JLR’s global business with likely ease on semiconductor supply, turnaround of PV business post restructuring of domestic business coupled with attractive valuation, we reiterate our BUY rating on the stock with a revised Target Price of Rs600 (vs. earlier Rs575).

New Launches for India Business and JLR to Gain Strong Traction 

JLR’s new Range Rover (RR), Range Rover Sport and Defender supported further order book growth to 215K units (higher by ~10K units QoQ). According to the management, customer response for new RR was much stronger than Discovery. A record order book of 215K and historically lowest inventory would lead to strong sales performance in FY24, though company has guided for lower JLR volume of ~85K in 4QFY23E due to slower improvement in semiconductor supply. Moreover, its new launches in domestic PV segment have shaped it PV portfolio to complete makeover in last 2-3 years. Its entry into E-LCV with initial high bookings, order wins for E-Buses and range of new launches on EV platform over next 2 years strengthens company’s business position. Its deal for domestic PV in EV segment and increasing EV focus with strong customer acceptance of its products would transform TTMT to a completely new horizon in the next decade. Improved margin territory, higher brand equity, cost savings augurs well for the company. Thus, it’s all structural improvements are on track, despite near term hurdles.

Outlook & Valuation 

We expect TTMT’s domestic volume to witness a growth of 34% in FY23E. We expect better JLR volumes in 4QFY23 and strong double-digit growth of 32% in FY24E due to ease on semi-conductor supply. Factoring higher than expected JLR’s average realization in FY23E, we increase our revenue/EBITDA estimates by 5%/18% for FY23E and 11%/15% for FY24E. We expect company’s Revenue/EBITDA to clock CAGR of 24%/39%over FY22-FY25E and a PAT of Rs261bn in FY25E (vs. net loss of Rs6.2bn in FY22). Stock is currently trading at an attractive P/E valuation of 8.5x/6.1x FY24E/FY25E and EV/EBITDA of 5.1x/4.3x FY24E/FY25E. We maintain our BUY rating on TTMT with a revised SOTP based Target Price of Rs600, rolling forward our valuation to FY25 valuing the business at Rs712 and excluding the net debt of Rs112/share. 

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Conference Call – Key Takeaways

       JLR Business:

• In 3QFY23, the business witnessed an EBIT margin of 3.7% vs. 1% in 2QFY23 due to higher wholesale volumes, stronger product mix, better pricing and favorable forex leading to improved profitability and cashflows. 

• Free cash flow stood at £490mn in 3QFY23. 

• Wholesales for the quarter stood at 80k (up 6% QoQ and up 15% YoY) while retails up 6% YoY (down 4% QoQ). 

• Demand remains strong with record bookings of 215k units, with Range Rover, Range Rover Sport and Defender accounting for over 74% of the pending orders. New Range Rover/Range Rover Sport production ramps up to over 27,456 units (vs. 13,537 units in 2QFY23) with 2,300 avg weekly production in 3QFY23. The company indicated that JLR and retailer inventory are moving more towards normal levels. The mix of electrified vehicles (BEV, PHEV and MHEV) stood 67% vs. 65% QoQ. 

• In China, 3Q was impacted by lockdowns followed by high rates of sickness across the country. 50% of retailers were impacted with an average of 19 lost sales days in the quarter. The company expects the situation to slightly normalize as over 90% of production employees are in work in Jan’23 expects no losses from Covid-19 in CJLR.

• The management expects chip shortage to continue with gradual QoQ improvement every quarter now onwards (expects FY23 volumes to be ~310k+).

India Business:

• Its PV market share stood to 14.1% in YTDFY23 (vs. 12.1% in FY22). Wholesales grew by 33% YoY to 132.3k vehicles driven by strong demand for Nexon, Nexon EV, Punch, Tiago and Tigor CNG. Retails grew 27% YoY in 3QFY23. The company commenced its deliveries of Tiago EV with strong order book of 20k+.

• EVs recorded the highest-ever quarterly sales of ~12.6k units while YTD FY23 volumes stood at 32.4k. Market share in EV stood at 85% in 3QFY23 (vs 87% in 2QFY23). EV penetration stood at 8% while CNG penetration stood at 9% in YTDFY23.

• CV EBIT margins stood at 5.9% (up 650 bps YoY) led by better mix, higher realizations, cost savings and softened commodity prices. The business was PBT positive at Rs0.9bn as compared to loss of Rs0.2bn in 3QFY22.

• Volume: In 2QFY23, TTMT’s total volume grew by 42% YoY (up 5% QoQ) to 2,43,387 units due to 47% YoY (up 5% QoQ) rise in domestic volume while, exports declined by 20% YoY (up 35% QoQ). Its domestic car volume grew by 19% YoY (up 16% QoQ), compared to the industry volume growth of 36% YoY. Its UV sales grew by 119% YoY and 6% QoQ to 93,538 units. Total MPV volume grew by 141% YoY (down 16% QoQ) to 1,520 units in 2QFY23. 

• Market Share: In 2QFY23, TTMT’s market share grew by 260bps YoY in the domestic PV segment to 14%. Its market share decreased by 150bps to 10.4% in the passenger car segment and rose strongly by 640bps YoY to 18.1% in UV segment. In the MPV segment, its market share increased by 170bps YoY to 3.8% in 2QFY23.

Cash flow: 

• Standalone: Free cash flow for the quarter stood at ~Rs8bn. The company spent a capex of Rs16bn in 3QFY23. It plans to spend Rs60bn capex in FY23E. 

• JLR: Free cash flow stood at £490mn in 3QFY23. Total capex stood at £622mn for 3QFY23. It expects 4QFY23 capex to be ~£0.7bn and FY23 capex to be ~£2.3bn. It expects annual capex of £2.5-3bn over next 2 years for JLR.

Automotive Debt: Net automotive debt stood at Rs575bn at 3QFY23-end vs. Rs599bn at 2QFY23-end.

Key Risks

• Prolonged slowdown in global economy 

• Massive slowdown in luxury car industry and failure of JLR’s new model

• Adverse change in government regulation, emission norms and taxation etc.

• Sharp jump in commodity prices  

• Adverse currency movement 

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