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Improving chip supplies & lower commodity costs to aid margins

In 3QFY23, JLR reported EBITDAM of 11.9% (+130bps YoY, +160bps QoQ), in-line with JMFe. Sequential improvement was led by favourable model mix, price hikes and positive operating leverage. India business EBITDAM stood at 8.1%, +170bps higher than JMFe driven by favourable mix and price hikes. TTMT expects chip supplies to gradually improve through CY23. Management has guided for positive EBIT and near break-even FCF for FY23 at JLR driven by gradual recovery in production, favourable mix and continued efforts towards cost efficiency through ‘Refocus’ programme. Global retail demand remains healthy with strong order backlog. Softening RM costs and operating leverage are expected to support margins going forward. Strong FCF generation is expected to support higher investments towards electrification at JLR. Tata Motors’ EV portfolio is leading the domestic EV space. Improving margins for both domestic CV and PV segments augurs well for the overall profitability of the company. Maintain BUY with Mar’24 SOTP of INR 575 (standalone / JLR valued at 10x /2.5x EV/EBIDTA). Slower rampup in production, slowdown in key global markets and inherent risk in evolving EV technologies are the key risks.

*JLR – Steady margin: JLR reported revenue of GBP 6.04n (+28% YoY, +15% QoQ), broadly in-line with JMFe. Wholesale volume (ex-CJLR) improved c.6% QoQ to c.80k units but was lower than our estimate of c.86k units due to supply challenges. Order book increased further to c.215k units (+5%QoQ) driven by strong demand for the new Range Rover models. EBITDA margin stood at 11.9% (+130bps YoY; +160bps QoQ), in-line with JMfe. Sequential improvement in margins was led by better model mix, price hikes and better operating leverage. FCF stood at positive GBP 490mn for 3QFY23 (negative GBP 294mn for YTDFY23). The company re-iterated lower break-even point of c.280k units wholesales for 3QFY23. Share of electric powertrain stood at 67% during 3Q, with 11% share of BEVs & PHEVs.

* JLR – outlook: Inventories at c.50k units (with dealers) and c.30k units (at JLR) continue to be impacted by supply constraints. TTMT highlighted that chip supply is expected to improve in 4QFY23 owing to recent long-term agreement with chip suppliers. However constraints are expected to continue with gradual recovery in CY23. The company guided for production of >c.80k units in 4QFY23. The management remains confident of achieving full year cost savings of GBP 1bn, near break-even FCF for FY23 and re-iterated its medium-term target of double-digit EBIT margin

* India business – margin beats estimates: Standalone revenue (pro forma of India CV + PV business) stood at INR 275bn (+32% YoY, flat QoQ), 6% above JMFe. Standalone business reported a positive FCF of ~INR7.9bn primarily driven by improvement in working capital and cash profit. EBITDAM stood at – CV 8.4% (+340bps QoQ; JMFe +220bps), PV 6.9% (+150bps QoQ; JMFe +90bps).

*India CV segment performance and outlook: CV segment EBITDA margin stood at 8.4% (+580bps YoY, +340bps QoQ). Sequential improvement was led by favourable product mix and better net price realisation. Demand from large fleet owners remains robust. The tailwinds for CV segment are a) improving transporter’s sentiment index, b) GoI

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