Buy Tata Motors Ltd For Target Rs. 528 - ICICI Securities
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Supply chain issues a near term headwind
Tata Motors’ (TTMT) reported strong retails in Q1 (124k units/up 68% YoY) even as chip shortages caused ~30k units production hit. Thus management expects (as guided post Q4 results) Q1 to witness cash outflow (~GBP1bn), negative EBIT. However, the negative surprise to consensus was for Q2, which is now likely to witness further impact due to chip shortages, production is expected to normalize from H2FY22 onwards. Wholesales in Q2 are likely to be lower (~50%) vis-à-vis planned production with cash outflow and EBIT to be similar to Q1. On the contrary demand remains robust, JLR order book is at historic high (~110k units), reflecting 3 months of sales (4/5 months in UK/Europe respectively). We believe, chip shortages related disruptions is a transient global supply chain issue which takes lesser precedence over the demand side (which is strong!). Maintain BUY.
Key highlights of the business update:
* Retail sales in Q1 were 124,537 vehicles, 68.1% YoY higher. Retails were higher YoY in all key regions including in the UK (up ~187%), Europe (up 124%), overseas (up 71%), North America (up ~51%) and China (up 14%).
* Wholesales in Q1FY22 were 84,442 units (excluding the China JV), up 72.6% YoY. However, this was ~30k units lower (~27%) than planned as a result of semiconductor supply constraints and the impacts of covid.
* Retail sales of all models (except XE) were higher YoY and sales of the new Defender continued to climb with 17,194 vehicles retailed in Q1. Defender orderbook continues to remain strong with over 29,000 units (over 4 months).
* JLR has sufficient liquidity of ~EUR3.7bn in cash and short-term investments (unaudited) as of Q1FY22. It currently maintains total liquidity of over EUR5.6bn including EUR1.9bn undrawn committed credit facility (RCF).
* Management would prioritize production of higher margin vehicles for chip supply available as well as make product specification changes to mitigate the impact.
Our View:
Chip shortages remain a dynamic situation and difficult to forecast in the short term due to the unique nature of the semi-conductor supply chain. Most global OEM’s (e.g. Ford, GM, Daimler) have witnessed similar chip shortages which has disrupted CY21 production schedules as capacity remains tight. We do not believe this to be lost sales as peers also don’t have significant surplus capacity to benefit. Our focus remains on: a) progress on Jaguar’s transformation into an EV pure-play, b) impact of LR new products (e.g. Defender, RR/RR Sport) on profitability. Maintain BUY.
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