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Above est.; beat driven by JLR; India also sees good recovery

Mix, cost savings, tight capex control drive QoQ debt reduction

* Tata Motors (TTMT) saw continued volume recovery in both businesses in 3QFY21. In addition to this factor, the benefit of the mix at JLR, certain favorable reversals at Jaguar Land Rover (JLR), and cost-cutting initiatives came together to deliver good all-round performance and QoQ debt reduction. Continued mix improvement in JLR and India, along with overall tight cost/capex control, would drive sharp improvement in operating performance and debt reduction.

* We upgrade our FY22E consol EBITDA by 7% (EPS upgrade of 36%), factoring in a) cost-cutting in JLR, b) volume upgrades in India PV and CV, and c) volume cuts in JLR. Maintain Buy, with TP of INR350 (Mar’23 SOTP).

Favorable mix, cost savings & cost reversals in JLR drive performance ◼ 3QFY21 consol revenue / EBITDA / adj. PAT grew ~6%/60%/86% YoY to ~INR756b/INR115b/INR32.3b (v/s est. INR714b/INR70b/INR0.8b). 9MFY21 consol revenue/EBITDA grew -19%/3%, while adj. loss was INR55.3b (v/s INR21b). Strong consol FCF generation was seen at INR79b in 3QFY21 (JLR at GBP562m and Standalone at INR22b), driving INR68b QoQ reduction in consol debt (auto) to INR547b.

* JLR – all-round beat, cost reversals & Fx gains drive stellar performance: Wholesale volumes (incl. Chery JLR) declined ~19% YoY to 119.7k (v/s est. ~113.7k). Net realizations grew 20% YoY to GBP58.3k (v/s est. GBP58.7k). EBITDA margins expanded 560bp YoY to 15.8% (v/s est. 11.3%), driven by a) a better mix (higher contribution from LR, China), b) lower variable marketing expenses (VME) / warranty, c) cost savings of GBP0.2b under Charge+, and d) 150bp benefit of reversal of regulatory fines and US residual value provisioning. Furthermore, Fx gains of GBP143m boosted adj. PAT to GBP385m (v/s est. PAT of GBP90m). The only negative was the EBITDA loss reported in CJLR – as it provided for higher VME for the liquidation of higher inventory.

* S/A – Op. performance in-line; EBITDA margins at 7.1% (v/s est. 7%): PV/CV volume recovery and cost-cutting resulted in EBITDA of ~INR10.4b (in-line). EBITDA margins expanded 420bp YoY to 7.1% (v/s est. 7%). EBITDA margins were at 8% (+580bp YoY) for the CV business and 3.8% for the PV business (v/s -3.6% in 3QFY20 and +1.6% in 2QFY21). However, higher depreciation and interest resulted in higher adj. net loss of ~INR6.3b (v/s est. INR3.7b loss in 2QFY21 and ~INR8.8b loss in 3QFY20).

Highlights from management commentary

* JLR: In 3QFY21, the brand saw one-off benefits in the form of reversal of compliance cost (GBP55m) and release of US residual reserve (GBP36m). Adjusted for this, EBIT margins would be ~5.2% (v/s reported 6.7%). The management indicated EBIT margins are sustainable at 4% levels as the mix would also normalize.

* QoQ sales recovery was seen in JLR in all markets, except the UK – where 3Q is seasonally lower. China sales were up YoY, while other markets continue to fare below pre-COVID levels. Inventory is at ideal levels. It expects 4QFY21 retails to be only slightly higher than 3Q (4Q usually has the strongest retails).

* JLR saw some impact of the second wave of COVID on sales operations in the UK and EU. Overall, 75% of JLR retailers are operational globally. The UK is the worst impacted – showrooms are closed (but remote sales are reported) – followed by the EU with just 60% of operational showrooms (due to total lockdown in France and Germany).

* Defender has a three-month order backlog or >14k units. It is ready to launch the Defender 90 variant.

* The CV industry is expected to clock 0.7–0.75m units in FY22 (v/s 0.72m units in FY20). The domestic PV industry would clock volumes of 3.2–3.3m in FY22 (v/s 2.8m in FY20).

Valuation and view

* TTMT would see the triple benefit of a) macro recovery, b) company-specific volume/margin drivers, and c) sharp improvement in FCF and leverage in both JLR as well as the India business.

* While Brexit-related headwinds are behind us, the near-term risk of volume disruption – due to the possibility of a second wave of COVID – in the EU and UK cannot be ruled out.

* The stock trades at 3.4x FY22 EV/EBITDA and 1.4x P/BV. Maintain Buy, with TP of ~INR350 (Mar’23-based SOTP).

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