IGI Logo

Production issues to delay JLR’s volume upturn; retain Buy

* JLR’s Q1 retail sales at 124,537 units beat our estimate of 110,000 units. However, the shortage of semiconductors affected its Q1 production by ~30,000 units. The impact is likely to be higher in Q2 and should result in negative EBIT and cash flows for the two quarters. Management expects an improvement in cash flows in H2 as supply improves.

* Demand is robust with an all-time high order book of 110,000 units, representing 3 months of total sales cover (5 months in Europe and 4 months in the UK).

* Due to near-term production constraints, we expect some dispatches to spill over from FY22 to FY23. For JLR (excl China JV), we cut FY22E volume by 8% and increase FY23E volume by 4%. As a result, we reduce consolidated FY22E EBITDA by 9% and increase FY23E EBITDA by 3%.

* Retain Buy as we expect 1) a strong cyclical upturn in the standalone business and JLR, 2) margin expansion emanating from cost-cutting measures, and 3) debt reduction. Our revised TP of Rs400 (Rs410 earlier) is based on 2x/11x FY23E EV/EBITDA of JLR/standalone business and the value of other subsidiaries/investments at Rs69/share.

JLR witnessing robust demand, but semi-conductor shortage impacting production:

Q1 retail sales stood at 124,537 units (-2% CAGR over 2 years), above estimates. China (+5% CAGR) and North America (+1% CAGR) regions have witnessed higher volumes, while other regions such as Europe (-4% CAGR), UK (-6% CAGR) and ROW (-5% CAGR) have seen a decline. Global retail orders stand at an all-time high of 110,000 units and dealer inventories are low at ~20,000 units. Production plans were hit by ~30,000 units in Q1, and the impact is likely to be higher in Q2 at ~50% of planned production (impact could be 60,000- 65,000 units). Management expects negative EBIT margin, and expects cash flows to be negative GBP1bn each of the two quarters. We expect JLR to report a loss of GBP90mn in Q1 on revenue of GBP4.8bn and EBITDA margin of 10%. Production levels are expected to improve in H2 due to a gradual improvement in semiconductor supplies. For JLR (excl China JV), we cut FY22E volume by 8% and increase FY23E volume by 4%. There could be an upside risk to estimates if supplies recover at a faster pace.

Incorrect demand forecasting by Auto OEMs led to semiconductor shortages:

As per International Data Corporation, the semiconductor industry is expected to grow by 12.5% to USD522bn in CY21, following 10.8% growth in CY20. Auto OEMs had cancelled chip orders after incorrectly forecasting lower demand due to the pandemic, and when demand bounced sharply, chip factories were not in a position to ramp up supplies due to long lead times. In addition, there is strong demand in consumer, computing and mobile phone (5G) segments. Also, there were supply issues due to a fire at a Renesas chip fab in Japan in Mar’21 and disruptions to chip plants after severe winter weather in Texas. Several companies, including TSMC (Taiwan), NXP (Europe) and Intel (US), are ramping up supplies, and an improvement is expected by the end of CY21.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer