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Improved margins; Outlook positive

Tata Motors is a leading automobile manufacturer in India which designs, manufactures and sells commercial vehicles and passenger vehicles. Tata Motors acquired Jaguar Land Rover (JLR) in 2008.

* Consolidated revenue grew by 5.5% YoY (+41.3% QoQ) to Rs. 75,654cr in Q3FY21. Tata Motors (standalone) retail volume up by 66% QoQ to 152.1K units; JLR retail volume increased by 13% QoQ to 128.5K units.

* With the help of several cost cutting initiatives, margins improved significantly in Q3FY21. EBITDA Margin up by 540 bps YoY and EBIT margin up by 450 bps YoY.

* As supply chain issues in various markets get resolved, we expect JLR revenues to pick up gradually. Also, vaccination drive progress in India enabling re-opening of schools, offices could increase demand for commercial vehicles adding to overall demand. We reiterate our BUY rating on the stock with a revised target price of Rs. 372 based on SOTP valuation methodology.

Strong performance from higher realizations

In Q3FY21, Tata Motors posted revenue growth of 5.5% QoQ to Rs. 75,654cr on the back of solid improvements in realizations supported by better product & variant mix. In Q3FY21, overall EBITDA margin rose to 15.4%, up by 540 bps YoY, whereas EBIT margin expanded by 450 bps to 7.2%. Resultantly, company was able to generate positive free cash flows for second consecutive quarter. Increased spending across infra projects, housing, and mining projects aided commercial vehicle sales whereas new forever portfolio generated strong sales momentum for PVs recording highest ever revenue in the history.

Increased margin translates to record cash flows for JLR

Improved sequential performance enabled JLR to report best-ever Q3 EBIT margins at 6.7% (over the last 5 year period), and highest-ever free cash flows in the business’ history. China continued to be the strong market accounting for 19% YoY revenue during the quarter, outperforming the other regions. North America, Europe and other overseas markets meanwhile recorded decent growth on QoQ basis. Excess inventory issues were resolved and have been brought down to ideal levels. VME costs were also down to 5% thereby contributing to increase in EBIT margin.

Key concall highlights

* During Q3FY21, promoter group exercised warrants worth Rs. 2,600cr, thereby leading to an increase in Tata Group’s voting share to 45.82%.

* Net automotive debt saw further reduction of Rs. 7kcr declining to Rs. 54.7kcr during the quarter (as against Rs. 61.5kcr at the end of Q2FY21).

* Capex investment plan for FY21 revised upwards to Rs. 1,850cr from Rs. 1,500cr earlier to address the additional demand from Passenger Vehicles segment.

* Company achieved cost savings worth approx. Rs. 5,100cr YTD, out of the total committed target of Rs. 6,000cr.

* Semiconductor shortage & steel availability remains an ongoing concern in focus per management; to be addressed in the coming quarters.

Valuation With a robust order pipeline, a desirable product mix coupled with strong executional capabilities, TATA Motors is well-placed among peers, and is expected to outperform the industry in terms of growth with demand on the rise. We reiterate our BUY rating on the stock with a revised TP of Rs. 372 based on SOTP methodology.

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