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Margins, FCF continue to positively surprise

Tata Motors’ (TTMT) Q4FY21 operational performance was ahead of consensus estimates with consolidated EBITDA margin at 14.4% (up 444bps YoY), driven by strong performance in domestic PV (~5%)/ CV(~9%) and JLR (15.3%). FCF generation (Q4: Rs102bn) aided net debt reduction (QoQ: Rs 138bn) and conservative FY22 FCF target is >GBP 500mn (excluding one-time restructuring costs).

In JLR management remains focussed on capital deployment towards future technologies with low going concern risk while improving core EBIT margins (FY24 target: >7%). TTMT remains the market leader in domestic CV business which we believe would be multi-year growth story (expect >30% CAGR for industry over FY21-24E). On domestic PV, TTMT has surprised investors with market share gains, margin improvement in ICE segment (FY21:>8%) while grabbing customer mind space via EV offerings (e.g. Nexon). Maintain BUY.

* Key highlights of the quarter:

Standalone revenues grew ~106% YoY to ~Rs200bn while JLR revenues grew ~21% to ~GBP6.5bn. JLR’s EBITDA margin improved 1054bps to 15.3% driven by structural cost reductions as Project Charge+ delivered FY21 cash savings of GBP2.5bn. JLR reported a healthy FCF of GBP729mn in Q4 driven by reduction in structural costs. India PV/CV businesses clocked EBITDA margins at 4.9%/9.1% (both up 110bps QoQ), respectively. India business delivered Rs29.5bn of FCF driven by improved pricing, mix and tight working capital. TTMT booked one-time non-cash write down of EUR952mn related to discontinued models and EUR571mn towards restructuring costs at JLR.

* Key takeaways from concall:

Management indicated a) realisations declined in JLR due to shift of product mix towards LR SUV2/3 models in UK and Europe vis-àvis SUV5 models in China (new year driven) in Q3; b) cost-savings on VME and warranty is likely to cumulatively sustain at 20k units, aggregate level order book stands at ~100k units; and d) India PV inventory stood at <10 days and Apr/May’21 is being used to bridge the gap and reduce wait time.

* Maintain BUY:

We believe improving domestic PV business/CV upcycle and managements enhanced focus on FCF generation to be debt free by FY23/24 augurs well for investor confidence. We believe reporting separation of PV/CV business aids value discovery. We reiterate our BUY rating on the stock with a revised SoTP-based target price of Rs536 (earlier: Rs457).

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