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Firing on all cylinders, profitability up move promising

Tata Motors (TML) reported stellar Q3FY21 results. Consolidated sales rose 5.5% YoY to | 75,654 crore (JLR sales down 6.5%, India sales up ~35%). Consolidated margins were at near six year high of 16.9% (JLR 15.8%, India 7.4%) on the back of sharp ~500 bps savings in other expenses on percentage of sales basis and softer than expected gross margin contraction. Consolidated PAT was at | 2,941 crore. Tata Sons holding, post conversion of warrants as of January 2021, was at 45.8%.

JLR profitability, cash flow delivery remains strong

At JLR, China’s performance continues to lead the way in the post Covid period (95% retailers fully open vs. 65% on total basis) – while UK and Europe lag behind. Product mix remains tilted in favour of Land Rover, thereby impacting blended realisations positively. Defender volumes are healthy (monthly run rate of ~5,000 units, order book at >14,000 units) – with model year upgrades to E-Pace, F-Pace, Range Rover and Discovery also set to aid volumes in coming months. JLR margin commentary is encouraging; it claims to have reached pre-Covid levels of profitability at the EBIT level, and aims to deliver another healthy print in Q4FY21E. Lower variable marketing and warranty costs going ahead (estimated at ~10-11% vs. mid-teens in earlier quarters) are slated to act as longer-term margin tailwinds. JLR has guided for near-breakeven cashflows in FY21E (currently at -£545 million) – which would be a creditable turnaround from previous years (-£ 1,296 million in FY19, -£759 million in FY20) especially given the Covid impact on FY21E. This reflects the continued progress made under Project Charge & Charge+ (combined cash, cost savings target of £6 billion by FY21E; presently delivered £5.7 billion). For JLR we build 15.9% volume CAGR over FY21E-23E (albeit on low base) & 13.4% margins by FY23E.

India improvement story showing promise

India PV performance in 9MFY21 has defied the industry (TML volumes up 39% vs. 16% industry decline) – translating into 300 bps market share gain and healthy profitability at EBITDA level (Q3FY21 EBITDA was highest in 10 quarters). Excellent response to the Altroz, Harrier and ‘New Forever’ portfolio along with upcoming Safari, Hornbill launches places PV business in good stead. CV segment is also recovering fast, aided by return of infra and mining demand in trucks and LCV resilience. We believe the domestic CV industry has turned a corner (~2 years of cyclical downturn nearly behind us) – with strong growth prospects up ahead (albeit on a reduced base). The same bodes well for TML (heavy truck market leader), although continued sluggishness in buses is a cause for concern.

Valuation & Outlook

For TML we factor in 19% sales CAGR in FY21E-23E, with FY23E profit of | 8,323 crore. We remain enthused by TML’s deleveraging intent and upbeat margin and cash flow guidance at JLR. We maintain BUY, valuing TML at | 301 on SOTP basis (10x, 3.25x FY23E EV/EBITDA to standalone business & JLR respectively; earlier target | 210).

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