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JLR 2QFY22 wholesales at 60-65k (est. 80k units)

Underlying demand strong with best-ever order book

* TTMT hosted a call to update on the supply-side shortages at JLR, based on schedules received in the last week of Jun’21 from key suppliers. The management expects supply-side issues to restrict 2QFY22 wholesales to just 60-65k units (v/s ~84k units in 1QFY22/initial plans of 125k units/our estimate of 80k units), partly supported by plant-level inventory. It expects supplies to improve from 2HFY22 as calamities (fire in Japan and floods in Texas) that had impacted supplies are expected to normalize. It is witnessing strong demand across markets and has an order book of over 110k (excluding China and the US). Key highlights from the meetings are:

* Wholesale volumes (excluding JV) for 2QFY22 would be 60-65k units as against its original plans of 120-125k units. In 1QFY22, it sees wholesales of ~84k units, based on a production of 75k units. Against this, it expects production at 55-60k units in 2QFY22. Against the initial plan of wholesales of ~235k units in 1HFY22, it would end up losing 85-90k units (~30k in 1QFY22) and sell 145-150k units in 1H.

* It had an inventory of 74k units as of Jun’21 and a dealer/in-transit inventory of ~31k units. This will help to reduce impact at the retail level.

* Semiconductor supplies have been hit by calamities impacting plants. Fire at Renesas (Japan) and flooding in Texas (which houses several factories) had further impacted supplies. While the Renesas plant in Japan is expected to fully normalize by Jul’21, fab factories in Texas are also expected to return to normalcy in due course. This gives confidence to the JLR management that 2HFY22 would see easing pressures. Structural improvement in supplies for chips is expected over the next 12-18 months.

* It will try to mitigate the impact via: a) product specification/features modification wherever possible, b) mix optimization, and c) security of the supply chain and by working directly with suppliers and semiconductor suppliers.

* It doesn't expect any delay in new product launches due to the chip supply issue. It plans to launch the new Range Rover in 1QFY23.

* Demand remains strong across markets. It has the highest ever order book at 110k units (excluding China and the US). It has seen very few cancellations so far, but can't rule out if the waiting period will increase substantially.

* It maintained its capex guidance of GBP2.5b, with GBP600m each planned for 1Q/2QFY22. It doesn't intend to delay capex on new products. It would revisit its revenue and margin guidance with its 1QFY22 result.

* The semiconductor shortage is impacting all its peers as suppliers are the same. The vendor has an obligation to allocate it fairly, and hence the probability of retail market share loss is limited. Different OEMs may take a different position. For example, VW may decide to use available chips for the Porsche rather than the VW brand. In that case, JLR would lose share as Porsche is its competitor and not VW.

* We had downgraded our FY22E consolidated EPS by 40% due to supply-side issues at JLR. The guided wholesale volumes at 60-65k units is lower than our estimate of 80k units and would result in a further downgrade to our FY22E estimate. However, FY23E should not see any material impact.

* Valuation and view: All three businesses of TTMT 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 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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