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JLR 1QFY22 wholesales impacted by chip shortage

2QFY22 to see higher impact; GBP2b negative FCF, EBIT loss in 1HFY22

* JLR’s retails grew 68% YoY to ~124.5k in 1QFY22, with LR/Jaguar growing 72.5%/55%.

* Wholesales stood at 84,442 units (excluding China JV), up 72.6% YoY. However, this was ~30,000 units lower (~27%) than what otherwise would have been planned as a result of semiconductor supply constraints and the impact of COVID-19, although this reduction had been broadly anticipated.

* Based on recent inputs from suppliers, the chip supply shortages in 2Q are expected to be greater than that in 1QFY22, potentially resulting in ~50% lower wholesale volumes than planned. It expects the situation to start to improve in 2HFY22. Hence, it expects a negative FCF of ~GBP1b, with a negative EBIT margin in 2QFY22.

* It expects to report an EBIT loss, a negative FCF of GBP1b each in 1Q/2QFY22, and a substantial improvement in 2HFY22 as chip supply improves.

* While the present supply constraints continue, the company will continue to prioritize the production of higher margin vehicles for available chip supply as well as make chip and product specification changes wherever possible to reduce the impact.

* However, retail demand remains strong. At present, it has ~110,000 global retail orders, the highest in the company’s history, representing three months of sales cover, with five/four months in Europe/the UK. Orders for the Defender alone total over 29,000 units, representing over four months cover.

* Mr Thierry Bolloré, CEO, JLR, stated, “The present semiconductor supply issues represent a significant near-term challenge for the industry, which will take time to work through. We are encouraged by the strong demand we see when supply recovers. We are taking strong steps to ensure the security of our supply chain for the future, working with our suppliers and chip manufacturers directly to increase visibility and control over chip supply for our vehicles.”

* This supply-side related disruption in 1HFY22 would substantially impact JLR’s volumes and earnings in 1H and FY22. However, FY23 should not see any negative material impact of supply-side disruptions. We lower our FY22E consolidated EPS estimate for TTMT by 40%, but largely leave unchanged our FY23E estimate.

* Valuation and view:

All three TTMT’s businesses are in recovery mode. While the India CV business would see a cyclical recovery, the India PV business is in a structural recovery mode. JLR is also witnessing a cyclical recovery, supported by a favorable product mix. However, supply-side issues will defer the recovery process. While there would be no near-term catalysts from the JLR business, the India business (~50% of SoTP) would see a continued recovery. The stock trades at 9.2x FY23E consolidated EPS and 1.7x P/B. We maintain our Buy rating with a TP of INR400/share (Mar’23E SoTP-based).

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