Published on 8/06/2019 9:54:53 AM | Source: Motilal Oswal Securities Ltd

Neutral Tata Motors Ltd For The Target Rs.199 - Motilal Oswal

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JLR in-line, S/A disappoints; guides for recovery in both businesses in FY20

* Consol. sales declined 4% YoY to INR864b (in-line) and adj. PAT was at INR21.4b (our estimate: INR12b). For FY19, revenue increased 4%, while EBITDA was down 16%.

* JLR – lower D&A drives EBIT/PAT beat:

Net sales fell 6% YoY to GBP7.1b (in-line). EBITDA margin improved 240bp QoQ (-380bp YoY) to 9.8% (inline). However, a decline in D&A led to an EBIT margin of 3% (above our estimate of 1.8%) and PAT of GBP255m (our estimate: ~GBP104m).

* S/A – higher discounts impact margins:

Revenue declined 3.2% YoY to INR185.6b (in-line). EBITDA margin shrank 420bp YoY (-150bp QoQ) to 7.3% (our estimate: 9.2%) due to higher discounts. Higher other income and lower interest restricted the drop in adj. PAT to 68% YoY (INR1.8b v/s our estimate of INR4b).

* Earnings call highlights:

(a) JLR – in China, the key operational KPIs are stabilizing, viz., achievement rate of retail targets, reduction in stock and improvement in dealer return on sales. (b) It has attained good success in cutting investments/WC (~GBP1.1b achieved in FY19 v/s target of GBP1.5b by FY20). (c) Cost-cutting initiatives have resulted in savings of GBP150m (of targeted GBP1b). Large part of cost savings are likely to fructify in FY20 through workforce reduction (GBP0.4b), D&A reduction (gross savings of ~GBP0.3b), lower marketing expenses, overheads, etc. (d) TTMT has tweaked its guidance for FY20-21 – EBIT margin of 3-4% (maintained) and negative FCF (earlier expectation of FY21 to be FCF positive). For FY22/23, it has guided for an EBIT margin of 4-6% (v/s 7-9% earlier for FY23). (f) Consol. net auto debt at INR284b (v/s ~INR469b as of Dec-18).

* 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)


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