Notable cash savings, demand outlook uncertain
Tata Motors (TML) reported a muted performance in Q1FY21. Consolidated net sales were at | 31,983 crore, down 48% YoY (India down 80%, JLR down 44%) tracking 81.5% YoY volume decline in standalone and 45% YoY volume decline at JLR operations. Reported EBITDA margins were at 2.6%, down 330 bps QoQ amid 125 bps sequential dip in JLR margins to 3.5%. Consequent consolidated loss after tax was at | 8,444 crore, with JLR PBT loss at £413 million and standalone loss at | 2,191 crore.
Strong “Project Charge+” delivery fuels margin optimism
JLR cost and cash savings programme Project Charge+ continued to deliver handsomely in the Covid-impacted quarter. Savings of £1.2 billion (£500 million in costs - of which large part was structural in nature, £400 million in inventory, £300 million in investment reductions) in Q1FY21 brought lifetime total to £4.7 billion. The company raised targeted savings by £1 billion to £6 billion, with remainder sought to be achieved in areas of investments, inventory, material costs, warranty, VME, other overheads. Consistently faster than promised Charge+ progress makes us optimistic about JLR’s future margin trajectory, although pick-up in production in coming months would stunt present furlough, some other benefits. We build 10%, 12.5% EBITDA margins at JLR in FY21E, FY22E, respectively. Similar India programme delivered | 1,020 crore in cash savings in Q1FY21. The company remains confident of achieving | 6,000 crore cash savings target in FY21E.
FCF guidance –real positive; demand recovery still uncertain
JLR’s Q1FY21 negative FCF (£1.2 billion) was £500 million better than previous guidance (included £1.1 billion in working capital outflows – expected to reverse as production ramps up) while India negative FCF of | 4,300 crore was lower than guidance by | 700 crore. Amid ongoing focus on costs, capex, both businesses committed to turning FCF positive (JLR from FY22E in sustainable manner, standalone from FY21E) while also reducing debt levels from FY22E onwards. However, outlook on volume growth remains clouded by the evolving pandemic situation in different geographies. For JLR, China is set to continue to drive sequential improvement (buoyed further by Defender launch) while in India, we expect CV business to remain a laggard. Strong product portfolios in JLR and India PV business, however, are positives. JLR will continue to ramp up its hybrid & electric offerings, having lined up four plug in hybrids, six mild hybrids for launch by the end of FY21E.
Valuation & Outlook
For TML we build 4.5% sales CAGR in FY20P-22E, with FY22E profit of | 2,848 crore. While TML’s cost, cash flow focus is encouraging, pace of demand recovery remains an unknown. We await green shoots of revival before turning decisively positive. We value TML at | 115 on SOTP basis i.e. 10x & 3.5x EV/EBITDA (FY22E) to TML standalone business & JLR, respectively, retaining our HOLD rating on the stock.
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