A sustainable recovery in volumes in JLR, particularly in the profitable markets of China, along with the ongoing cost-cutting initiatives, is key to value- accretive growth and stock performance. This is particularly important due to the impending downcycle in the cash-cow India CV business in FY21. The stock trades at 13.3x/8.8x FY20/21E consol. EPS. Maintain Neutral with a target price of INR146 (Mar’21E SOTP-based).
Going forward, we expect topline, EBITDA to grow at a CAGR of 5.1%, 19.5%, respectively, in FY19-21E. PAT is expected to be volatile given the nature of TML’s earnings that include a high degree of one-offs. Market conditions remain challenging globally and in India, clouding our outlook. Using SOTP valuation technique we value TML at Rs 160 i.e. 8x EV/EBITDA (FY21E) to TML standalone business (~15% premium to its competition) and 3x EV/EBITDA (FY21E) to JLR. We retain our HOLD rating on the stock.
JLR tie-up with BMW, directionally correct… Valuation & Outlook: JLR witnessed demand concerns starting June 2018 amid uncertainty over Brexit, tariff barriers in China, a general auto slowdown in China among others. This led to a decline in sales, which continued until April 2019. Going forward, as the base effect kicks in from June 2019, we expect its performance to normalise from here on amid conscious efforts to reduce cash costs, improve brand perception, control working capital cycle and capex outgo. However, we await positive commentary from JLR on volume as well as cash costs savings perspective before any meaningful change in our stance. However, the present collaboration mitigates risks over cash flow burn at JLR on upcoming technologies over a longer timeframe. We stick to our HOLD rating on the stock with a target price of | 185.
Standalone turnaround 2.0 delivering results. Tata Motors Investor day highlighted details about its medium-to-long term strategy (Turnaround 2.0) for the domestic business. With focus on topline growth, customer centricity, enhanced dealer engagement, agile cost management and a lean & accountable organization, the management reiterated their key objectives: 1) Outperforming the industry for both the CV & PV segment (CV & PV volumes for TTMT up 17.5% % 12% respectively for FY19) 2) EBIT margin target of 4-6% over FY20-22 and 5-7% in the long run (FY19 EBIT margins at 3.8%) 3) Higher FCF generation curtailing Subsidiary investments within affordable limits. While the domestic demand environment for the next 3-6 months is expected to remain muted, H2 should see some recovery on anticipated pre-buy ahead of BS VI implementation. JLR outlook remains muted both for volumes and profitability with cut in EBIT margin guidance over FY20-21E to 3-6% (earlier 4-6%) owing to continued demand challenges & model run-outs. Retain ‘’Accumulate’’ with a target price of Rs192, where we value JLR at 1.5x Mar’21E EV/EBITDA and Standalone entity at 9x Mar’21E EPS.
Volume outlook remains bleak Consolidated performance for Tata Motors over Q4FY19 surpassed our expectations, with JLR operating margins at 9.8% v/s our estimate of 8.8%. Standalone margins however, stood lower than expected at 7.3%, owing to high discounting in the industry. For full year FY19, JLR EBIT margins came in at -0.7% (Q4FY19 EBIT at 3%) and the management has again revised their EBIT guidance for FY20-21E downwards at 3-4% (earlier 3-6%) on account of demand challenges and run-out of their most selling models Range Rover & Range Rover sport. While dealer inventory levels have lowered in China, demand is yet to pick up, wherein some recovery is expected H2FY20 onwards. TTMT’s cost reduction efforts have been yielding results, however, volume uptick remains key. We currently factor in 5.8%/6.7% volume growth for JLR for FY20/21E respectively and downgrade to ‘’Accumulate’’ with the target price of Rs192, where we value JLR at 1.5x Mar’21E EV/EBITDA and Standalone entity at 9x Mar’21E EPS.
Outlook & Valuation: In view of the challenges in JLR business and ongoing slowdown in domestic operations, we tweak few of our estimates for FY20E/FY21E. In light of massive slowdown in JLR’s business, higher debt level and expected cash crunch, we maintain our REDUCE recommendation on the stock and retain our an SOTP-based Target Price of Rs135 (valuing the standalone business at Rs130, JLR at Rs222 and other subsidiaries at Rs22, based on FY21E EBITDA, post excluding net debt of Rs239/share).
JLR in-line, S/A disappoints; guides for recovery in both businesses in FY20. Valuation view: We raise our consol. EPS estimate for FY20 by ~16% to factor in lower depreciation at JLR and higher other income in S/A. However, we note that the weakening outlook for the India business is fading the cost-cutting-led recovery at JLR. FY21 could be a tough year for India and JLR (run-out of most profitable RR/RR Sport). Further, the noise around EVs, Brexit and trade-war adds to the uncertainty. Hence, we maintain Neutral rating with a target price of INR199 (Mar’21 SOTP).
JLR’s Nov’18 wholesales in line at 49.3k units (-9% YoY) Jaguar volumes increase 23% YoY, while Land Rover declines 18.5% YoY. The stock trades at 7x FY20E consolidated EPS, 2.1x EV/EBITDA and 0.5x P/BV. Maintain Buy with a target price of INR246 (Sep-20 SOTP-based).
Operational challenges at JLR continue… With JLR reporting weak performance for this quarter again, with volumes down 14.7% YoY, EBIT margins at -0.7% & adj. PAT loss of GBP75mn, Tata Motors consolidated adjusted loss stood at Rs3.3bn, while standalone margins stood at a decent 8.5% and standalone adj. profit came in at Rs4.5bn. While Q3 is anticipated to remain muted, JLR is expected start recovering over Q4FY19, where the management expects full year FY19 to see flat volume growth and EBIT breakeven, on the back of higher seasonal sales and aggressive cost reduction efforts. Concerns over sales in China are expected to persist over the near term with dealer inventory in China for Chery JV currently at 2 months. Standalone performance for the company remains on track. We currently factor in ~6% volume growth for JLR over FY19-20 and maintain “BUY” with the target price of Rs267, where we value JLR at 2x Mar’20E EV/EBITDA and Standalone entity at 9x Mar’20 EPS.
Challenging times continue at JLR… Negative FCF; subdued return ratios; retain HOLD! JLR is investing aggressively in technologies amid an uncertain business outlook, thereby generating negative free cash flows & stressing its balance sheet. This is likely to result in muted return ratios with RoCE<10%. Going forward, revising our estimates, on consolidated basis, over FY18-20E we expect sales to grow at a CAGR of 5.9%. On the margins front, we expect ~140 bps contraction in EBITDA margins with a consequent drop in PAT over FY18-20E. We revise our target price to | 200/share on SOTP basis and maintain our HOLD rating on the stock. The only saviour for TML is the up trending domestic segment wherein the company is witnessing robust prospects both in the M&HCV space as well as PV segment.
JLR’s wholesale of 53k units (-8% YoY) exceeds estimate Jaguar volumes up 9% YoY, but Land Rover volumes decline 19% YoY. The stock trades at 9.1/5.3x FY19E/20E consolidated EPS. Maintain Buy with a target price of INR335 (Sep-20 SOTP-based).
JLR’s Aug-2018 wholesale above estimate at 42.7k units Jaguar +29.4% YoY (+14.3% MoM), while Land Rover -14.9% YoY (+26% MoM). The stock trades at 9.2/7.2x FY19E/20E consolidated EPS. Maintain Buy with a target price of INR353 (September-2020 SOTP-based).