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JLR turnaround to boost valuation

As per guidance provided post H1CY22 results by peers of JLR, volumes in global luxury car space are set to remain flattish in CY22 with slight moderation in EBIT margin by ~100-200bps over CY21 due to input cost inflation. With focus toward EVs and product development, outlook for capex/R&D expenses remain largely unchanged YoY for most peers as well as JLR, which has guided for FY23 capex at ~GBP2.5bn, similar to that in FY22. As against peers, JLR’s Q1FY23 retails were relatively more affected as it was undergoing the RR/RR Sport run-out phase, resulting in loss of volumes and mix (this was over and above the impact of China lockdown). To maintain ex-CJLR wholesale volumes flat YoY, JLR needs production of ~80k units per quarter in the rest of FY23. With an outlook suggesting ~90k units in Q2, we believe JLR is on course to compensate for its Q1 under-performance. Besides, improvement in scale and mix and rationalisation in input material costs should take care of margin-recovery and mitigate energy cost inflation. We believe, wholesales of ~30k units per month in the coming months would be good enough for JLR to meet its GBP1bn FCF guidance for FY23, with its FCF breakeven volumes being at ~25k units/month. With the orderbook at 200k units and sub-par inventory levels, we remain convinced of JLR meeting our FY23E volume estimate of 360k units. Maintain BUY on Tata Motors (TTMT) with an unchanged SoTP-based price target of Rs646.

Noteworthy aspects of peer-set guidance:

* As against peer-set retails being up ~3-5% QoQ in the Jun’22 quarter, JLR’s retails were down 6% primarily due to: 1) RR/RR Sport run-out phase limiting production of this higher-margin model to a mere ~6k units vs its typical run-rate of ~25k units. With production of these models gradually returning to normalcy (~1.5k units/week currently) along with their combined orderbook at ~82k units, we believe the guided figure of 90k units in Q2FY23 is achievable. Besides, the China lockdown impacted retails by ~5k-6k units in Q1FY23 and we believe this would normalise from Q2.

* JLR’s guided EBIT margin of ~5% seems on the higher side for FY23 currently and, to achieve it, we believe it needs to deliver an EBITDA margin of ~15% for the remaining quarters of FY23. With EBIT margin guidance for global peers being slightly subdued YoY due to input cost inflation, we are building-in EBITM of ~1.5% for JLR (up 150bps YoY) vs the guidance of ~5% (FY23E EBITDAM at 10.5% vs Q1 at 6.3%).

* In CY21, PHEV+BEV volume mix across peers and JLR was largely around ~12- 15%, with Audi being on the higher side at ~44%. With a solitary BEV in the form of I-Pace, Jaguar is set to become all-electric by CY25, with LR becoming all-electric by CY30. Thus, in order to maintain the R&D momentum towards EVs, all peers including JLR have guided for R&D expenses at largely similar levels to CY21. Thus we continue to build-in capex of GBP2.5bn for JLR in FY23E.

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