Buy Tata Motors Ltd For Target Rs.375 - ICICI Direct
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Chip shortage to limit near term growth at JLR…
In a business update, Jaguar Land Rover (JLR) flagged the global semiconductor supply shortage as an area of concern that has impacted Q1FY22 performance (wholesales lower than anticipated by ~27%) and is set to adversely affect near-term outlook as well (Q2FY22E wholesale volumes now seen ~50% lower than earlier expected).
Gradual easing on the cards
JLR’s retail sales in Q1FY22 were at 1.24 lakh units, up 68% YoY and flattish QoQ. However, at the wholesale level, volumes (excluding the China JV) were at 84,442 units, ~30,000 units i.e. 27% lower than planned, hampered in part by the supply constraints surrounding semiconductors globally.
The company said the shortage is difficult to forecast at present, with the situation set to worsen in Q2FY22E leading to possible ~50% reduction in planned wholesale volumes. While H2FY22E is set to fare better, it expects underlying structural supply issues to be resolved in a gradual manner over the next 12-18 months as new capacities come on board. Accordingly, JLR anticipates that some level of shortages would continue into the next year also. The company, on its part, would prioritise production of higher margin vehicles taking into account chip availability and specification changes, etc.
Volume disappointment leads to lowering of margin estimates
Post Q4FY21, the company had guided for >20% YoY volume growth at JLR in FY22E. Building in the latest commentary, we now expect FY22E volumes of 4.28 lakh units, up ~4% YoY. Amid the significant near-term hit on the topline, the company now expects negative EBIT performance in Q1FY22E as well as in Q2FY22E along with possible operating cash outflow of £1 billion in each quarter.
We believe the steep reduction in volumes is bound to impair margin performance in FY22E on account of negative operating leverage. However, JLR’s solid delivery on cost and cash savings in recent times, structural shift towards lower warranty and variable marketing expenses and reduced breakeven points (from ~6 lakh units per annum in FY19 to < 4 lakh units per annum currently) lead us to limit downward revision in JLR and Tata Motors (TML) margins.
Valuation & Outlook
We now expect TML’s FY21P-23E sales CAGR of 18.4% with FY23E EPS of | 37.6. The chip shortage-led production warning comes as a negative surprise and is likely to impact CFO generation in FY22E. However, we retain our positive stance on TML for the medium to long term given its intent to reduce automotive net debt to near zero levels (from ~| 41,000 crore as of FY21), alertness to global automotive mega change of electrification (Jaguar to be all-electric by 2025, Land Rover to introduce 6 BEVs in the next five years; EV leader in India 4-W currently via Nexon) and focus on sustainable FCF generation, going forward. Accordingly, we maintain BUY with a revised SOTP based target price of | 375 (12x, 3.3x FY23E EV/EBITDA to India, JLR businesses respectively; earlier TP | 400).
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