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All round miss; chips shortage and commodity cost hurt

JLR guided at Wholesales of 160k units in 2H, FCF breakeven in FY23

* TTMT’s 2QFY23 performance was an all-round miss. JLR continues to struggle with semiconductor shortages, which has been impacting its performance for the last five-to-six quarters. Its India CV and PV businesses were hit by residual commodity cost inflation, which should reverse from 3QFY23. The ramp-up in JLR’s production is key as demand is strong, especially in its most profitable products of RR, RR Sport, and Defender (72% of the order book).

* We cut our consolidated EPS estimate for FY23 (to a loss from a profit) and FY24 (by 6%) to account for a slower production ramp-up at JLR. We maintain our Buy rating with a Sep’24E SoTP-based TP of INR500.

JLR hurt by chip shortages; India business hurt by cost pressures

* Consolidated business: Consolidated revenue/EBITDA grew 30%/53% YoY to INR796.1b/INR62b. Adjusted loss narrowed to INR12.6b (estimated profit of INR7.5b) from INR44.4b in 2QFY22. Consolidated Automotive FCF was positive at INR10b in 2QFY23 (v/s a deficit of INR32b in 2QFY22), despite working capital being adverse by INR14b. Revenue grew 19% YoY, EBITDA was flat, and adjusted loss narrowed by 13% in 1HFY23.

* Semiconductor shortages and higher other expenses hurt JLR’s performance: Wholesale volumes (excluding JVs) grew 18% YoY and 5% QoQ. A better mix resulted in a 15.5% YoY and 14% QoQ improvement in net realization to GBP69.85k (est. GBP64k). EBITDA margin expanded by 3pp YoY and 4pp QoQ to 10.3% (est. 13.2%) on account of a better mix. Miss on margin was due to higher than estimated other expenses. EBITDA improved by 91% YoY to GBP541m (est. GBP574m). Adjusted loss stood at GBP98m (estimated loss of GBP4m) as against an adjusted loss of GBP381m in 2QFY22. JLRs had FCF outflow of GBP15m in 2QFY23 (vs outflow GBP664m in 2QFY22).

* Tata CV business – benefitting from a cyclical recovery: Volumes (including overseas subsidiaries) grew 15% YoY in 2QFY23, led by a 22%/12% growth in M&HCVs/LCVs. Realizations improved by 18% YoY to INR1.64m (est. INR1.61m), led by price hikes and mix. Revenue grew 35.5% YoY to INR164.2b (est. INR162.6b). EBITDA grew 2x YoY to INR8.35b (est. INR10.3b). EBITDA margin rose 190bp YoY to 5.1% (est. 6.3%). Margin was impacted by the residual impact of commodity cost inflation. Recurring PBT stood at INR2.9b (est. INR4.75b) v/s a loss of INR1.5b in 2QFY22.

* Tata PV business – ramp-up continues: Volumes grew 69%, whereas realizations remained flat YoY at INR0.885m (est. INR0.9m). Revenue/ EBITDA grew 70%/1.6x YoY to INR126.5b/INR7.2b (est. INR128.4b/ INR8.9b). EBITDA margin fell 40bp YoY to 5.7% (est. 6.9%), impacted by residual commodity cost inflation and one-time provisioning for obsolescence (50bp). Recurring PBT stood at INR1.67b (est. INR2.1b) v/s a loss of INR2.1b in 2QFY22.

Highlights from the management commentary

* The management of JLR has lowered its FY23 guidance. It expects a positive EBIT margin for FY23 v/s its 5% guidance in 1Q and -1.5% in 1H. It aims to break even at the FCF level in FY23 (v/s its GBP1b guidance in 1Q and FCF outflow of GBP784m in 1H). It expects volumes of over 160k/~310k units in 2H/FY23. Its capex guidance stood unchanged at GBP2.3b in FY23.

* JLR has expanded its partnerships with semiconductor suppliers, which will aid an improvement in volumes beyond 2HFY23. The full benefit of various agreements will reflect in CY23.

* A favorable operating exchange rate contributed GBP55 (~1pp) to JLR’s EBIT. JLR has deployed forex hedges of GBP20.65b, at an average GBP:USD rate of 1.3 and at an average tenure of four-to-six quarters. It expects net forex (gain on operational forex less hedged losses) benefit to increase gradually as long as the GBP:USD is in a 1.1-1.2 range.

* In the CV business, it is shifting to a ‘demand pull’ business model for sustainable market share gains. It is focusing on returning back to double-digit EBITDA margin over the next few quarters.

* Net debt stood at INR599b in 2Q v/s INR607b in 1QFY23. Despite a reduction in JLR’s FCF guidance, it is maintaining its zero net debt target by FY24, but will revisit this target at the end of FY23.

Valuation and view

* TTMT should witness a gradual recovery as supply-side issues ease (for JLR) and commodity headwinds stabilize (for the India business). It will benefit from: a) a macro recovery in India, 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 18.6x FY24E consolidate P/E and 4.4x EV/EBITDA. We maintain our Buy rating, with a Sep’24E SoTP-based TP of INR500.

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