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Positives already priced into CMP

We attended the recent investor meet of Tata Motors (TTMT) and came back with the following key takeaways: 1) Management expects FY24 M&HCV growth to be single- digited and will endeavour for margin improvement through reduction in discounts. Freight rate discipline is intact and demand is expected to improve post monsoon. 2) Apart from Harrier EV, four new models are planned to be launched by FY25, two of which would be exclusively in the premium category. 3) Agratas, the Tata group venture for making battery cells, would help both India business and JLR with a stable supply chain in the coming years though there would not be much costing difference vis-à-vis alternate sources. 4) JLR remains confident of turning free of net debt by FY25 resulting in the overall company, TTMT, too turning free of net auto debt by the same year; 5) JLR’s EV launches are on schedule with the first RR BEV coming in CY24 followed by an all-BEV portfolio of Jaguar in CY25. We maintain our estimates and downgrade TTMT to ADD (from Buy) with a target price of Rs620, implying 10x/2.5x FY25E EV/EBITDA of India business and JLR respectively. Post the ~35% rally in past 6 months and limited triggers for increase in our FY24E-FY25E estimates, we downgrade TTMT due to limited upside potential from present levels. We believe, as we get closer to the peak of current CV upcycle in next 12-18 months, risk of CV downcycle would start getting factored into CMP well in advance of the actual downturn happening at the ground level.

Key takeaways and our views:

* For JLR, FY24 outlook largely remains in line with management guidance post Q4 result, i.e. volume of ~400k units, EBIT margin of ~6%, capex of GBP3bn and FCF of ~GBP2bn taking it to zero net debt by FY25-end. Within the orderbook of ~200k units, the higher-margin models (RR/RR Sport/Defender) account for 76% -- which gives visibility of the ~GBP75k ASP levels sustaining ahead. EV launch pipeline remains as per prior commentary with the first RR BEV coming in CY24 followed by an all-electric Jaguar portfolio by CY25. Going by the competitive intensity in the EV space in forthcoming years in the luxury car market, we believe it would be tough to execute the ~10% EBITM for JLR by FY26 as guided. Scaling up of EV portfolio ahead would ask for higher capex vs the planned ~GBP3bn, as capex/sales of ~12-13% over ~GBP30bn revenue would take capex towards ~GBP4bn by FY26, we believe. With working capital reversal benefits getting used up by FY25E, we believe it would be a tall order for annual FCF to exceed ~GBP2bn FY26E onwards, amidst sub-5% volume growth, ~12% EBITDAM and rising capex needs.

TTMT is looking forward to mid-to-high single digit growth in the goods M&HCV space in FY24, post TIV moving from 150k to 420k units in FY22-FY23. It is focusing on discount reduction initiatives to improve EBITDAM and sustain it above ~10%. In PVs, Harrier EV and 4 new models (Curvv, Sierra, Avinya and another one) are planned to get launched by FY25, with the latter two having only EV versions. Domestic PV market growth in FY24 is expected at high single digit levels. The battery cell-making business initiated by Tata group through its subsidiary Agratas would cater to both India business and JLR and would benefit TTMT by stabilising the supply chain rather than in terms of cost.

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