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The next leg of growth to be led by JLR; PV/CV to see stable growth

* TATA Motors (TTMT)’s 3QFY24 result was a strong beat, as consolidated EBITDA/PAT came in at INR153.3b/70.9b (vs. est. INR137.6b/35.1b). JLR reported an EBIT margin of 8.8% during the quarter (+150bp QoQ), while the management maintained its margin guidance of 10% for FY26.

* We upgrade our consolidated EPS by 23%/26% for FY24E/25E to factor in: better-than-expected gross margin in JLR, higher other income, and lower tax. Reiterate BUY with an FY26 SOTP-based TP of INR1,000.

Margin improvement in JLR and CVs, except PVs

* Consolidated business: Consol. revenue/EBITDA/adj. PAT grew 25%/ 59%/1.4x YoY to INR1,105.8b/INR153.3b /INR70.9b  (v/s est. INR1,073.9b/INR137.6b/INR35.1b). Automotive FCF was healthy at INR64b (grew 21% YoY), driven by JLR’s FCF of GBP626m (grew 28% YoY). Net debt (of Auto) reduced INR95b QoQ to INR292b. TTMT’s revenue/EBITDA/adj. PAT grew 32.5%/1.2x/LTP YoY during 9MFY24.

* JLR – EBIT margin expands to 8.8%: JLR’s volumes (excl. JV) grew 27% YoY (+4% QoQ) to 101k (v/s est. 100k units). Net realizations declined 4% YoY (+3% QoQ) to GBP73k/unit (v/s est. GBP73.7k).EBITDA margin improved 410bp YoY (+130bp QoQ) to 16.2% (v/s est. 15.1%). Margin improvement was aided by a favorable mix and reduced RM costs. JLR’s adj. PAT surged 1.3x YoY to GBP592m (v/s est. GBP317m).

* Tata CV business – EBITDA margin at 11.1%: CV volumes grew 4% YoY (-7.5% QoQ), while realizations improved 14.5% YoY to INR2.04m (v/s est. INR1.91m). EBITDA margin improved 260bp YoY to 11.1% (v/s est. 9.4%), driven by a better mix, higher realizations, cost efficiency measures, and commodity cost savings.

* Tata PV business – 3Q ICE EBITDA margin at 9.4%, while EV margin at a breakeven before R&D expenses: Volumes grew 5% YoY. Realizations remained grew 5% YoY to INR938.1k (v/s est. INR916k) in 3QFY24. Savings in RM were offset by higher fixed expenses, leading to EBITDA margin contracting 50bp YoY to 6.5% (v/s est. 7.0%).

Highlights from the management commentary

*  JLR – Demand: Not seeing any demand issues in the US while Europe is relatively stable. Management is not seeing any change in the pace of EV penetration. It continues to expect operating cash flow to support net debt of

* CV outlook: Fleet utilization continues to be at a healthy level. Transporters’ profitability remained stable. Management is witnessing a drop in government spending due to the election, and seeing a pause in growth in 4QFY24. It expects 4Q volume to decline by a single digit, followed by a soft 1QFY25. Subsequently, other macro indicators would remain positive and this should ensure a healthy CV demand.

* PV outlook: FY25 industry growth will be challenging, and the industry is likely to grow by <5% YoY.  

Valuation and view

*  TTMT should witness a healthy recovery as supply-side issues ebb (for JLR) and commodity headwinds stabilize (for the India business). The next leg of growth will be driven by JLR, as we expect EBIT margin to reach ~9.9% by FY26, in line with the management’s guidance. While the India CV and PV businesses would see some moderation in growth in FY25E, the focus shifts to margin expansion-led earnings growth, which is likely to sustain.

*  The stock trades at 16.6x/14.1x FY24E/FY25E consolidate P/E and 6.1x/4.8x EV/EBITDA. Reiterate BUY with an FY26 SOTP-based TP of INR1,000.

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