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Outperformance continues across segments…

Tata Motors (TML) reported an operationally strong Q4FY21 performance. Consolidated sales rose 41.8% YoY to | 88,628 crore (JLR sales up 20.5%, India sales up ~106%) amid ~7.5% volume increase at JLR and ~90% India volume jump. Consolidated margins were down 37 bps QoQ at 16.5% (JLR 15.3%, India 8.7%) on the back of operating leverage benefits and softer than expected gross margin contraction. Consolidated loss after tax was at | 7,585 crore, with the company booking net exceptional charge to the tune of | 13,347 crore (| 9,606 crore for cancelled JLR models under ‘Reimagine’ & | 5,388 crore for restructuring costs at JLR).

Tailwinds in place for medium term volume recovery

Near term performance outlook across JLR, India CV, India PV business is clouded by confluence of Covid resurgence domestically, global semiconductor shortage although there are encouraging signs in the form of (a) strong JLR order-book of ~1 lakh units (including ~22,000 units for Defender), (b) 20% YoY volume growth in FY22E. Defender, in particular, has done well and helped grow JLR market share in served segments to 6% as of Q4FY21 vs. 4.4% as of Q1FY21. In India, we expect PV business to continue to build on its stellar FY21 performance amid shift to personal mobility post Covid, strong response to the New Forever range. Furthermore, the CV division as the market leader is slated to benefit from the impeding cyclical recovery in the space that coincides with demand tailwinds in the form of the government’s infra push, pickup in construction and mining activities and resilience in e-commerce segment. We build 16%, 21.4% JLR, India volume CAGR, respectively, in FY21-23E.

Cost, efficiency focus key to uptick in margins

Project Charge+ delivered on the outlined £6 billion cast, cost savings as per schedule while similar India programme overperformed by | 3,300 crore. Under ‘Reimagine’, Project Refocus seeks to deliver value of up to £1 billion across business areas in FY22E. At JLR, focus on efficiencies (cash flow breakeven reduced to ~FY14 levels), quality of sales (via lower variable marketing expenses and warranty costs) and better product mix (in favour of Land Rover) are seen leading a structural shift in margins towards a higher plane. The company is also targeting tighter control over fixed costs in India, with operating leverage benefits set to mitigate some of the impact of commodity cost inflation over the medium term. TML is targeting FY22E JLR and India EBIT margins at >=4% and ~2.5%, respectively.

Valuation & Outlook

For TML we factor in 21.4% sales CAGR in FY21-23E with FY23E EPS at | 38.3/share. Progress on deleveraging, margin & cash flow generation fronts is encouraging, with JLR EV transition under Reimagine a key monitorable. We maintain BUY, valuing TML at | 400 on SOTP basis (12x, 3x FY23E EV/EBITDA to standalone business & JLR, respectively (earlier TP | 375).

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