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JLR outlook improving; India margin disappoints

Tata Motors’ (TTMT) Q2FY23 performance was a mixed bag with JLR margin back to 10%; however, India margin was impacted by 200bps (QoQ) due to lag effect of higher input cost contracts trickling into numbers. JLR’s EBITDA margin came in at 10.3%, up 400bps QoQ, owing to a combination of better model mix, improved market mix, rising scale benefit amidst marginal forex losses. RR and RR Sport refresh production picked up to 2.4k units a week vs 6k units wholesale in Q1FY23, and thus, the mix is set to improve further from Q3FY23 with new chip supply agreement coming in place. Thus, with most headwinds for JLR on the verge of being resolved, we believe JLR is likely to revert towards 12% margin levels, with scope to reverse GBP2bn of working capital-related increase in debt. India business though impacted temporarily, is largely set to reach the targeted 10% EBITDA margin level in coming quarters with margin tailwinds coming in place. Maintain BUY on TTMT with SoTP-based price target of Rs571 (earlier: Rs646), implying 12x / 2x FY24E EV/EBITDA for India/JLR, respectively.

Key takeaways from conference call:

* JLR volume got impacted in Q2FY23 due to unexpected chip-supply issues from its key supplier based on which it gave guidance of ~90k units wholesaling in Q2, resulting in ~75k units getting sold. With net orderbook increasing further to 205k levels led by RR/RR Sport/Defender along with improved outlook of chip supply as per fresh contracts from November, JLR is targeting ~160k units in H2FY23 vs 147k units in H1. With blended ASP at ~70k GBP (vs ~63k in FY22) led by preferred production of higher ASP/margin models, JLR is looking forward to be FCF neutral in FY23, with scope for reversing GBP2bn of working capital driven debt on books in next 4-6 quarters. Despite input cost inflation in terms of commodities, wage cost, power cost, freight cost etc., JLR was able to operate at FCF neutral scale of 70k75k units/quarter, which we believe is commendable and paves way for improvement in FCF generation with scale ramping up through better chip supplies.

* India business witnessed negative margin surprise for both CVs and PVs as 80bps of raw material pressure got factored in the numbers other than 50bps one-off in the PV segment in the form of write-offs. Going ahead management is expecting full reversal of this 80bps gross margin impact along with further improvement in gross margin led by input commodity cost reduction and price hikes. Demand outlook remains steady across PVs/CVs, though the pace of growth albeit on benign base of last year will start normalising from coming quarters. EV volume will see an additional trigger ahead with Tiago EV getting launched. India business generated Rs7bn of FCF this quarter despite working capital led challenges and would improve on this with better margin ahead along with reversal in working capital.

* Consolidated FCF came in at Rs10bn and net auto debt now stands at ~Rs600n and the management is maintaining its outlook of becoming net auto debt free by FY24-end. JLR and India (including EVCo) capex outlook remains at GBP2.4bn and Rs60bn for FY23. TTMT also announced its intent to delist the American Depository Shares (ADS) from NYSE, each representing 5 ordinary shares of TTMT and this arrangement will have no cashflow impact on the company.

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