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Strong performance in JLR and CVs

India CV/PV on track to be near net debt zero by FY24, but not JLR

* TTMT’s 3QFY23 operating performance was a beat, driven by strong mix benefits for JLR and lower discounts in the India CV business. JLR is seeing strong demand for RR/RRS/Defender (74% of order book), which augurs well for FY24 performance as supply has gradually improved. India CV should continue to benefit from good demand and focus on the demandpull strategy.

* We upgrade our consol. EPS estimates for FY23 (reduction in losses) and FY24 (by 19%) to account for a strong mix at JLR and better margin in the India CV business due to lower discounts. Maintain Buy with a TP of INR525 (Dec-24 SOTP based).

JLR benefits from strong mix; India CV from lower RM & discounts

* Consolidated business: Conol. revenue grew 22.5% YoY to INR885b (vs est INR827b). EBITDA grew 43% YoY to INR96.4b (vs est INR87.8b). Adj. PAT stood at INR29.6b (vs est of INR1.6b; net loss of INR16b in 3QFY22). Consol. Automotive FCF in 3Q was positive at INR53b (v/s INR40b in 3QFY22, INR10b in 2QFY23). Net consol. debt (Auto) declined by INR24b QoQ to INR575b. In 9MFY23, revenues/EBITDA grew 20%/18% YoY, whereas net adj. losses reduced by 54% to INR48b.

* JLR – Mix benefit dilutes impact of operating leverage: Wholesale volumes (excl. JVs) grew by 11% YoY. Net realizations improved 11% YoY (+9% QoQ) to GBP75.9k (est. GBP71.2k) due to a better mix. Despite a sharp improvement in mix, EBITDA margins declined 10bp YoY (+160bp QoQ) to 11.9% (vs est 12.5%). JLR’s PAT stood at GBP261m, aided by FX gains of GBP157m. JLR’s FCF improved to GBP490m (vs +GBP164m in 3QFY22, - GBP15m in 2QFY23).

* Tata CV business – benefitting from lower discounts & RM: Volumes declined 6% YoY in 3QFY23, led by growth in MHCVs (12% YoY) and a decline in LCVs (-14% YoY). Realizations improved 30% YoY (+9% QoQ) to INR1.78m (vs est INR1.65m). EBITDA margins improved 590bp YoY (+340bp QoQ) to 8.5% (vs est 5.9%), driven by a better mix, lower discounts, cost savings and softened commodity prices. Recurring PBT was at INR9.4b (vs est. profit of INR3.8b; INR1.5b loss in 3QFY22).

* Tata PV business ramping up: Volumes grew 33% YoY and realizations improved 3.4% YoY (+0.9% QoQ) to INR893k (vs est INR884k). EBITDA margins improved 400bp YoY (+130bp QoQ) to 7% (vs est 7.3%), benefitting from mix, commodity, operating leverage and certain one-off items (80bp benefit). Recurring PBT was at INR3.2b (vs est PBT of INR1.8b; loss of INR3.3b in 3QFY22).

Highlights from the management commentary

* JLR guidance maintained: Positive EBIT margin and FCF in 4QFY23 on wholesales of 80k or more are expected to help JLR achieve breakeven FCF (9MFY23 FCF outflow of GBP294m) and a positive EBIT margin for the full year

* FCF in 4QFY23 would be slightly lower than in 3Q, as it expects lower working capital release on QoQ basis. Hence, it expects FY23 FCF to be neutral or marginally positive.

* Cash inflow from working capital in 3Q was just GBP306m, as compared to total outflow due to working capital (due to chip shortage led lower production) GBP1.77b since 1QFY22.

* The order book would start tapering as supplies/production improve, but it will still be higher than the normal level over the next 12 months. RR is sold out for 12 months. CY23 will still be constrained for supplies rather than demand. It has enough levers to stimulate demand. It is currently taking order in-take of 30k/month, with materially lower SG&A and very low VME at 0.6%.

* The CV business is focusing on registration market share improvement with the demand-pull strategy (started cutting discounts from Sep’22), innovation intensity, restoring double-digit EBITDA margins and successfully delivering on new business models.

* TTMT believes its near net-debt zero target by FY24 would be a stretch for JLR, whereas the India businesses are on track to attain the same.

Valuation and view

* TTMT should witness a gradual recovery as supply-side issues ease (for JLR) and commodity headwinds stabilize (for the India business). It will benefit from: 1) a macro recovery in India, 2) company-specific volume/margin drivers, and 3) a sharp improvement in FCF and leverage in both JLR and the India business.

* The stock trades at 15.5x/12.5x FY24E/FY25E consolidate P/E and 3.9x/3.2x EV/EBITDA. We maintain our Buy rating with a TP of ~INR525/share (Dec-24Ebased SoTP).

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