Published on 13/07/2020 10:26:08 AM | Source: Motilal Oswal Financial Services Ltd

Buy Tata Motors Ltd For The Target Rs.122 - Motilal Oswal

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Below est.; sharp focus on cash generation, balance sheet deleveraging

COVID-19 hurts JLR business sharply, impairs India PV business

* TTMT’s 4QFY20 performance fully reflects the impact of COVID-19 in JLR’skey market, China. This, coupled with the initial impact in other geographiesand an all-round miss in India, led to sharp miss in operating performance. Asmall positive was the FCF positivity of GBP225m in 4Q.

* We lower our FY21/FY22 EBITDA by -18%/0% to factor weakness in volumesin both businesses and higher interest cost, resulting in PAT loss in both theyears. Maintain Buy, with TP of INR122 [Jun’22-based SOTP].


Adverse mix and operating deleverage hurt both businesses

* Consol. revenue/EBITDA declined ~28%/70% to ~INR625b/INR23.7b,translating to adj. loss of INR70b (v/s est. loss of ~INR33.6b) v/s ~INR17.7b in profit in 4QFY19. FY20 revenue/EBITDA declined 13.5%/23%.

* JLR – adverse market mix, higher VME hurt margin:JLR’s operatingperformance was adversely impacted by lower sales from China and higherVME, which hurt realizations (-6.5% QoQ). This, coupled with op. deleverage, hurt EBITDA margins to 4.8% (-600bp QoQ, -500bp YoY). JLR FCF came in +ve at GBP225m (v/s GBP1.39b in 4QFY19), driven by reduction in workingcapital.

* S/A – third consecutive quarter of EBITDA loss: Sharp volume decline, anadverse mix, and higher fixed cost led to a third quarter of EBITDA loss of~INR4.25b (v/s est. of ~INR0.4b). Adj. net loss stood at ~INR22.4b (v/s est. ofINR11.4b in loss) v/s PAT of ~INR1.7b in 4QFY19. The India PV business wasimpaired by ~INR14.8b.

* Consol. net debt (Auto) increased by INR28.2b QoQ to INR482b.


Highlights from management commentary

* Expect 1QFY21 FCF outflow of <GBP2b (GBP1.2b paid to vendors on time).

* China’s recovery is encouraging, with showroom leads higher over Apr–Mayby 11–14% YoY. Also, transacting prices have increased over Apr–May (1–2%higher than pre-C OVID-19 levels) and VME has reduced. Other globalmarkets have seen recovery in May (over April) and expect June to be betterthan May.

* The new Defender has 22k orders, and deliveries have been started in aphased manner from May’20.

* JLR and the India business efforts are focused on turning FCF positiveduring 2Q–4QFY21 and FCF positive for the full year FY22.

* In JLR, FY21 capex was cut to GBP2.5b (v/s GBP3.3b in FY20). Furthermore,an increase in cash generation target under project charge+ increased toGBP5b (from GBP4b in 3Q and GBP2.5b in 2Q). This is an additionalGBP1.5b for FY21 (v/s GBP3.5b delivered up to Mar’20). This would beachieved by reducing capex and inventory and improving operatingperformance.


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