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Mixed bag; JLR miss due to mix; India beat in CVs and PVs

Near term stress for JLR | Maintains target of near net debt zero by FY24

* TTMT’s 4QFY22 performance was a mixed bag. JLR mix deteriorated due to a runout of the old Range Rover, whereas the recovery in India businesses was strong. While demand for JLR remains strong, there are near-term pressures due to COVID-related lockdown in China and run out of the RR Sport. The India business should benefit from a continued demand recovery in CVs and production ramp-up in PVs.

* We cut our FY23/FY24 consolidated EPS estimate by 12% each to account for: a) a volume cut in JLR due to the lockdown in China and slower improvement in semiconductor supplies, b) cost inflation, and c) translation impact of the appreciation in the INR against the GBP on JLR consolidation. We maintain our Buy rating with a TP of INR485/share

JLR disappoints; India business shines

* Consolidated revenue/EBITDA/adjusted PAT fell 11.5%/31%/PTL YoY to INR784.4b/INR87.4b/-INR3.2b in 4QFY22 (est. INR813b/INR86.2b/- INR866m). Revenue grew 11.5% YoY, EBITDA fell 19%, and there was a loss of INR108b in FY22.

* Weak mix hurts JLR: Wholesale volumes (excluding JVs) fell 38% YoY (+11% QoQ). Net realizations declined sharply by 9% QoQ (+17% YoY) to GBP62.3k (est. GBP67.3k), due to a runout of the old Range Rover. Net sales for JLR improved by just 1% QoQ (-27% YoY) to GBP4.8b (est. GBP5.15b). Despite a weak mix, EBITDA margin was in line at 12.6% (+60bp QoQ and -270bp YoY) as other expenses were lower than estimated. EBITDA grew 6% QoQ (-40% YoY) to GBP599m (est. GBP650m). Net loss stood at GBP17m (est. of GBP54m).

* CV business: Volumes (including overseas subsidiaries) grew 7% YoY in 4QFY22 (LCV declined by 3% YoY, while M&HCVs grew 26% YoY). Realizations grew 20.5% YoY to INR1.55m (est. INR1.29m). Revenue grew 29% YoY to INR186b, but EBITDA fell 10% to INR11.3b. EBITDA margin stood at 6.1% v/s 4.2% in 4QFY21 (est.4%), impacted by higher RM costs, but partly offset by operating leverage.

* PV business: Volumes grew 47% YoY, led by growth in UVs (+132% YoY). Realizations grew 9% YoY to INR0.86m in 4QFY22. Revenue/ EBITDA grew 62%/128% YoY to INR105.9b/INR7.4b. EBITDA margin stood at 7% (+210bp YoY, est. 5.4%). The PV business turned PBT positive in 4QFY22 and was cash flow positive in FY22.

* FCF generation in the consolidated Auto business was INR79b (v/s INR40b in 3QFY22 and INR102b in 4QFY21). FCF for JLR improved to GBP340m (v/s GBP164m 3QFY22 and GBP729m in 4QFY21).

* Consolidated net debt (Auto) declined by INR117b QoQ to ~INR487b

Highlights from the management commentary

* JLR outlook: It expects global semiconductor supplies to gradually improve, though shortages will continue in FY23. 1QFY23 will be impacted by COVIDrelated lockdowns in China as well as a runout of the old RR Sport, which will result in lower volumes and a negative EBIT and FCF. Volumes are expected to improve progressively after 1QFY23, leading to an EBIT margin of 5% and an FCF of GBP1b.

* JLR’s order book rose to ~168k units (v/s 155k in 3QFY22), driven by strong demand for the new Range Rover (~46k units) and Defender (~41k units). It will also have to refill channel inventory (dealer and JLR) to ~90k units over the next few quarters from ~66k units at present.

* The outlook for the CV business: The trucker’s sentiment index is improving across segments. 4QFY22 saw a return of retail customers as well as recovery in the Bus segment, driven by the opening up of schools and offices. Finance availability for M&HCV Retail customers improved, with freight rates firming up. Despite uncertainties, the business sentiment continues to remain positive, with increasing fleet utilization and freight rates.

* Outlook for the India PV business: It expects the industry to surpass FY19 peak volumes in FY23. TTMT would deliver a strong improvement in margin and profitability in FY23. Despite a significant step-up in investments, the PV business is expected to be self-sustaining, while the EV business is well funded with the capital infusion.

* Maintains target of near net debt zero by FY24, driven by strong improvement in operating performance and FCF in all the businesses, possible asset monetization, and residual equity, if required.

Valuation and view

TTMT should witness a gradual recovery as supply-side issues ease and commodity headwinds stabilize (for the India business). It will benefit from: a) a macro recovery, b) company-specific volume and margin drivers, and c) a sharp improvement in FCF and leverage in both JLR as well as the India business. The stock trades at 13.4x FY24E consolidate P/E and 3.2x EV/EBITDA ratio. We maintain our Buy rating, with a TP of ~INR485/share (Mar’24E-based SoTP).

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