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Q2 EBITDA below estimates; expect gradual volume improvement ahead

Tata Motors’ Q2FY23 consol. EBITDA grew 53% YoY (3-yr CAGR: -5%) to Rs62bn, missing our estimate by 9% mainly due to cost pressure in India. Consol. revenue grew 30% YoY (3-yr CAGR: 7%) to Rs796bn, standing 3% above our estimate because of JLR’s improved mix. JLR’s order book is strong at ~205,000 units. Models such as new generation RR/RR Sport and Defender form >70% of the order book which should lead to product-mix improvement ahead. JLR production ramp-up is expected to improve at a slower pace in H2FY23 versus earlier expectations, due to supply constraints. Owing to lower volume (JLR) and margin assumptions, we reduce FY23-25E consol. EBITDA by 5-14%. We maintain our positive stance on expectations of a sales upcycle across segments, aggressive cost savings and debt reduction. We reaffirm BUY on the stock, with SOTP-based TP of Rs490 now (Rs515 earlier), based on Dec-24 estimates (Sep-24E earlier). Key risks: Further delay in production ramp-up due to supply issues, luxury car demand contraction in target markets, lower-than-expected growth in India CVs/PVs, failure of new launches and adverse currency/commodity prices.

Q2 EBITDA below estimates: Consol. revenue grew 30% YoY (3-yr CAGR: 7%) to Rs796bn, clocking 3% above our estimate of Rs773.7bn, mainly due to better-than-expected realization in JLR. Consol. EBITDA grew 53% YoY (3-yr CAGR: -5%) to Rs62bn, at 9% below our estimate due to lower-than-expected margins in India CVs and PVs. JLR's revenues grew by 36% YoY (3-yr CAGR: -5%) to GBP5.3bn (Emkay est.: GBP4.9bn), due to higher realizations on better mix. EBITDA grew by 91% YoY (3-yr CAGR: -13%) to GBP541mn, above estimates. Standalone (India CV) revenue grew 36% YoY (3-yr CAGR: 14%) to Rs149.5bn, below our estimate of Rs153.8bn, due to lower-than-expected realizations owing to lower share of CNG vehicles and increase in discounts. YoY EBITDA grew 170% to Rs6.5bn, below our estimate of Rs9.2bn, due to cost pressures. India PV revenue grew 72% YoY to Rs125.5bn, in line with our estimate (Rs127.3bn). EBITDA grew 52% YoY to Rs6.8bn, below our estimate of Rs8.3bn, due to commodity pressures and one-time costs (~Rs0.6bn). What we liked: 1) Order cancellations are not significant in JLR, and demand conditions remain healthy. 2) Commodity deflation benefits expected from Q3FY23. What we did not like: H2FY23 production ramp-up to be slower than expected in JLR due to supply constraints; this has led to reduction in EBIT/FCF guidance for FY23.

Earnings-Call KTAs: 1) JLR's FY23 volume expected at >310,000 units due to supply constraints. 2) RR/RR sport production ramp-up continues which should drive a better product-mix in H2FY23. 3) JLR margins and FCF to improve in H2FY23; FCF to be at breakeven level in FY23. 4) India CV/PV growth outlook remains robust. 5) India CV/PV commodity impact in Q2 was ~70bps and one-time impact in PVs stood at ~50bps. Expects commodity deflation benefits from Q3FY23. India CV EBITDA margin target remains at 10%. 5) India real-time driving emission norms to be implemented in Apr-23, which would lead to price increases for PVs and CVs, but the quantum of increase would be lower than that of price-increases during the BS6 transition. 6) FY23 capex plan at GBP2.3bn in JLR and at Rs60bn for the India business. 7) Consol. net auto debt reduced to Rs599bn in Sep-22 vs. Rs607bn in Jun-22. 8) Outstanding ADRs would be delisted and converted into ordinary shares.

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