About to leave the beaten track; upgrade to Buy
* After tepid volume performance for the past three years, we expect JLR’s volume growth to turn around from Q3FY21 on new products and recovery across regions. After a 19% volume decline in FY21E, we estimate 11% growth over FY21-23E.
* We expect a recovery in standalone operations as well, driven by strong growth in PVs and a pick-up in the CV sales cycle from Q4FY21E. Though we expect an 11% volume decline in FY21E, we estimate an improvement at 18% CAGR over FY21-23E.
* We increase FY21-23E consolidated EBITDA by up to 34%. After the revision, EBITDA is expected to see 27% CAGR over FY20-23E. Driven by better margins and controlled capex, we expect FCF to turn positive to Rs66bn/Rs80bn in FY22/FY23E.
* Consolidated net debt/EBITDA should improve from 3.8x in FY20 to 2x in FY23E. Upgrade to Buy with a revised TP of Rs196, based on 2x/10x EV/EBITDA for JLR/standalone operations on FY23E estimates (2x/8x on Sep’22E earlier).
JLR sales cycle to turn positive: We expect growth to turn positive from Q3FY21, supported by new products (launch of new Defender, model changeovers of F-pace/Velar and 6 PHEVs/7 MHEVs in FY21), continuation of growth in the China region and broad-based recovery across other regions. While we still expect negative volume performance (-19%) in FY21E, we forecast JLR’s volumes to improve and record 11% CAGR over FY21-23E.
Standalone volume performance to recover, driven by continuing growth in PVs and pickup in the CV cycle from Q4FY21E. PV volumes are seeing robust growth, driven by positive response for new model Altroz and an improvement in dealer profitability, resulting in more aggressive marketing initiatives. CVs could benefit from a long overdue replacement cycle, higher industrial output and gradual resurgence in infra spending. After an anticipated fall of 11% in FY21E, we expect volumes to witness 18% CAGR over FY21-23E.
Cost-cutting efforts have resulted in benefits of GBP0.8bn in JLR and Rs8bn in standalone operations in H1FY21. More benefits are targeted in H2FY21 at GBP0.4bn in JLR and Rs7bn in standalone operations. Focus areas include costs relating to material, manufacturing, marketing and employee. Led by better margins and controlled capex, we expect consolidated FCF to turn positive at Rs66bn/Rs80bn in FY22/FY23E.
Upgrading to Buy with a revised TP of Rs196. The stock trades at an EV/EBITDA of 3.3x and P/B of 0.7x on FY23 estimates vs. 10-year average EV/EBITDA of 5.1x and P/B of 1.7x. Key downside risks include a no-deal Brexit, luxury car demand contraction in target markets, failure of new launches, and adverse currency/commodity prices.
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