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Incremental headwinds emerge for JLR JLR likely to see persistent margin pressure ahead

* Tata Motors (TTMT) reported a weak consolidated performance in 2QFY25, with margins contracting ~150bp YoY to 11.6% (est. 13.2%). This was mainly due to weaker volumes and high cost pressures for JLR, while India business remained resilient despite weak demand.

* While management has maintained its guidance for JLR despite several headwinds, we believe margin pressure is likely to persist for JLR over FY24- 27E, given weak demand, rising discounts and normalizing mix. Even in India, both CV and PV businesses are seeing moderation in demand. We have lowered our EBITDA estimates for TTMT by 3%/7% for FY25/FY26 to factor in weakness in JLR business. The stock trades at 15x FY25E/FY26E consol. EPS and 6.5x/5.5x EV/EBITDA. Reiterate Neutral with Sep’26E SOTP-based TP of INR840.

India business remains resilient despite weak volumes 

* Consolidated business: 2QFY25 consol. revenue/EBITDA/PAT declined ~3.5%/14.5%/14% YoY to INR1014.5b/INR117.4b/INR33.4 (est. INR1002b/INR132.6b/INR42.7b). EBITDA margin declined 150bp YoY to 11.6% (est. 13.2%). There was a cash outflow of INR29b in 2Q (vs. FCF of INR12b in 1Q). Net auto debt increased by INR34b to INR220b. 1HFY25 revenue/EBITDA remained flat YoY, and PAT grew 16% YoY. 2HFY25 revenues are estimated to remain flat YoY, while EBITDA/adj. PAT are expected to decline 4%/2% YoY.

* JLR: Volumes (incl. JV) declined 11% YoY to 97.2k (est. 105k units). Net realization was up 5% YoY/flat QoQ at GBP74.2k/unit (est. GBP73.4k). EBITDA margin declined 320bp YoY to 11.7% (est. 14.5%), while EBIT margin contracted 220bp YoY to 5.1% (est. 6.8%). Margins were impacted by lower wholesales and higher selling costs, partially offset by prioritization of RR production and reduced material costs.

* TTMT CV business: Revenue declined 14% YoY to INR173.3b (est. INR167.7b), led by volume decline of ~20% YoY. ASP grew 7% YoY to INR2.01m (est. INR1.93m). EBITDA margins expanded 30bp YoY (-90bp QoQ) to 10.7% (est. 10.8%). The benefit of RM cost softening was offset by higher staff costs.

* TTMT PV business: Revenue declined 4% YoY to INR117.85b (est. INR109.9b), affected by 6% YoY decline in volumes but 2.5% YoY growth in realizations at INR903.1k/unit (est. INR831.1k). EBITDA margins contracted 20bp YoY (+40bp QoQ) to 6.2% (est. 5%) due to operating deleverage.

Highlights from the management commentary

* JLR outlook: Despite tougher market conditions, JLR has maintained its FY25 guidance of 8.5% EBIT margin (1HFY25 margin at 7.1%) but reduced its FCF guidance from GBP1.8b to GBP1.3b (vs. cash outflow in 1HFY25). It has also retained its FY26 guidance, but clarified that it now has little headroom left to achieve the same.

* Incremental headwinds in China market: China is facing severe headwinds, as a weak demand environment has led to extreme levels of discounting in the market. While the ICE market was down 22% YoY in 1H, the premium auto market was down 12% YoY. JLR has done relatively well in China in 2Q, the company expects this macro weakness to hurt its performance in 2H.

* India CV outlook: Increased infra spending, coupled with festive consumption, should help to revive CV demand in 2H. In terms of recovery, passenger bus segment is expected to grow better in 2HFY25, followed by ILCV segment, as per management. Demand for SCV and HCV will be monitored given a weak show in 2Q. Overall, management expects FY25 to remain flat or slightly improve YoY.

* India PV business: TTMT clocked 68.5k units of retails (highest ever) in Oct’24, which led to Vahan market share bouncing back to 13.7% (vs. 13.3% in 1HFY25). Nexon clocked the highest ever retails since FY17. Channel inventory now stands at below 30 days. It expects lower industry wholesales in the next couple of months as OEMs would focus on streamlining inventory to adequate levels ahead of CY25.

Valuation and view

* While management has maintained its guidance for JLR, we think it is likely to see persistent margin pressure over FY24-27E, given: 1) weak demand in key regions 2) rising cost pressure as it invests in demand generation, 3) normalizing mix, and 4) EV ramp-up, which is likely to be margin-dilutive. Even in India, both CV and PV businesses are seeing moderation in demand.

* While there is no doubt that TTMT delivered a robust performance across its key segments in FY24, there are clear headwinds ahead that could hurt its performance. We have lowered our EBITDA estimates for TTMT by 3%/7% for FY25/FY26 to factor in weakness in JLR business. The stock trades at 15x FY25E/FY26E consol. EPS and 6.5x/5.5x EV/EBITDA. Reiterate Neutral with Sep’26E SOTP-based TP of INR840.

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