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Mixed bag; JLR in line despite a sharp beat on volumes

Near term challenges notwithstanding deleveraging to continue

* TTMT’s performance in 4QFY21 was a mixed bag as the overall operating performance was in line. JLR’s performance was restricted by an adverse mix, despite a sharp beat in volumes. In a seasonally strong quarter, consolidated net debt fell ~INR73b YoY (down INR138b QoQ) to INR409b. 1QFY22 would be challenging for both businesses, though the outlook beyond that is positive.

* We maintain our FY22E/FY23E EPS estimate. Maintain Buy with TP of INR400/share (Mar’23E SoTP).

JLR mix offsets operating leverage; India in line, PV recovery sustains

* Consolidated revenue/EBITDA grew ~42%/437% YoY in 4QFY21 to INR886.3b/INR127.4b (est. INR860b/INR107b). Adjusted PAT stood at INR57.4b (v/s a loss of INR70b in 4QFY20 and our estimate of INR36.4b).

* Consolidated revenue declined 4% YoY, while EBITDA grew 55% in FY21. Adjusted profit stood at INR2.2b (v/s a loss of INR91b in FY20). FCF generation remained strong in both businesses – JLR (GBP729m) and standalone (INR29b) – in 4QFY21 (seasonally strong quarter), resulting in a reduction in net debt.

* Better than estimated volumes, but in line EBITDA margin for JLR: Wholesale volumes (including Chery JLR) grew ~9% YoY to 136.5k (est. ~124.8k). Net realization declined by ~9% QoQ (+16.5% YoY) to GBP53.3k (est. GBP58.7k), impacted by adverse mix (lower China and higher Jaguar sales). Net sales grew 21% YoY to GBP6.5b (est. GBP6.5b).

* EBITDA margin for JLR fell 50bp QoQ (+10.5pp YoY) to 15.3% (est. 15.4%). The sequential decline in margin was impacted by weaker mix (China contribution was lower and Jaguar contribution was higher by ~510bp) and non-recurrence of certain benefits (~150bp). Forex gains of GBP116m boosted adjusted PAT to GBP566m (est. PAT of GBP371m). It took a GBP1.5b write-off in 4QFY21 (in addition to GBP3.3b in the last two years), including GBP952m of non-cash write downs on investments and GBP534m of restructuring charges expected to be paid in FY22.

* Standalone operating performance in line; PV business EBITDA margin at 4.9%: PV/CV volume recovery and cost-cutting resulted in an EBITDA of INR16.5b (in line). EBITDA margin expanded 12.6pp YoY (+120bp QoQ) to 8.3% (est. 8.9%), with CV business margin at 9.1% (+950bp YoY, +110bp QoQ) and PV business margin at 4.9% (v/s -17.9% in 4QFY20 and +3.8% in 3QFY21). Higher product development expenses led to an adjusted profit of ~INR98m (est. INR492m PAT v/s 3QFY21 loss of INR6.3b).

Highlights from the management commentary

* JLR FY22 outlook: Volume growth is expected to be over 20%. EBIT target of 4% is on the conservative side owing to volume uncertainty, led by the semiconductor shortage. It expects to break even at the FCF level post investment of GBP2.5b and restructuring costs of GBP0.5b. EBIT may be negative in 1QFY22 due to the impact of weaker volumes on account of the semiconductor shortage.

* JLR has an order book of ~0.1m units (~60% of orders are from Europe and the UK). Defender’s order book stands at over 22,000 units. PHEVs have a very high waiting period of up to 12 months.

* Volumes in India in 1QFY22 TD have been severely impacted by the lockdown as almost 80% of dealerships are shut. Sales in Apr’21 fell ~50% and is worse in May’21. It is targeting an EBIT margin of over 2.5%, with positive free cash flow in FY22.

* Fund raising was more of an enabling resolution across instruments, keeping in mind the second COVID wave. Raising funds via the equity route remains the last option for the company. The board has deferred the fund raising decision to the next meeting (AGM).

Valuation and view

* Near term headwinds notwithstanding, TTMT would see the triple benefit of: a) macro recovery, b) company-specific volume/margin drivers, and c) sharp improvement in FCF and leverage in both JLR as well as the India business.

* The stock trades at 4.4x/3.3x FY22E/FY23E EV/EBITDA. Maintain Buy with a TP of ~INR400/share (Mar’23E-based SoTP).

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