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The best seems to be behind

JLR EBIT margin to remain flat YoY, India growth outlook subdued

* TTMT’s 4QFY24 result was operationally in line with our estimate as EBITDA margin expanded 30bp QoQ to 14.2%. While there is no doubt that TTMT has delivered an extremely robust performance across its key segments in FY24, there are clear headwinds ahead that are likely to hurt its performance.

* We have lowered our EPS estimates by 3%/5% for FY25/FY26. The stock trades at 18x/15.6x FY25E/FY26E consolidated EPS and 6.2x/5.3x EV/EBITDA. Reiterate Neutral with our FY26E SOTP-based TP of INR955 (from INR970 earlier).

Net auto debt declines to INR160b in FY24 from INR437b in FY23

* Consolidated business: 4QFY24 revenue/EBITDA/adj. PAT grew 13%/ 33%/37% YoY to INR1,199.9b/INR169.9b/INR77.3b (vs. est. INR1,184.7b/INR168.6b/INR63.9b). 4Q consolidated EBITDA margins were exactly in line with our estimates at 14.2%. PBT before exceptional items stood at INR92b vs. our estimate of INR88.2b due to lower depreciation and higher forex gains. Adjusted PAT (for deferred tax credit of INR87.8b) came in at INR77b, ahead of our estimate of INR64b largely due to a sharply lower tax rate.

* Automotive FCF was healthy at INR269b in FY24 (up 19% YoY), driven by JLR’s FCF of GBP2.3b from GBP0.5b in FY23. Net debt (of Auto) declined to INR160b in FY24 from INR437b in FY23.

* JLR – EBIT margin expands to 9.2%: JLR’s volumes (excl. JV) grew 16% YoY to 110.2k units (est. 111k). Net realizations declined 5% YoY to GBP71.3k/unit (est. GBP73.1k). EBITDA margin grew 150bp YoY (+10bp QoQ) to 16.3% (est. 16.6%). EBIT margin of 9.2% (+270bp YoY, in line) reflects higher wholesales, reduced material costs and improved pricing, partially offset by VME and FME. JLR PBT at GBP661m was below our estimate of INR730m due to lower margins. JLR’s adj. PAT surged 2.8x YoY to GBP732m (est. GBP544m). PAT beat was largely due to a lower tax rate.

*  Tata CV business – 4QFY24 EBITDA margin at 11.9%: CV volumes declined 6% YoY, while realizations improved 8% YoY to INR1.94m (est. INR2.03m). EBITDA margin improved 170bp YoY to 11.9% (est. 11.3%), driven by a better mix, higher realizations, cost efficiency measures, and commodity cost savings.

* Tata PV business – 4QFY24 ICE EBITDA margin at 10.2%, while EV margin at 1.1% before product development expenses: Volumes grew 15% YoY, while realizations grew 4% YoY to INR931.7k (est. INR940k) in 4QFY24. Savings in RM costs were offset by higher fixed expenses, leading to flat EBITDA margin YoY at 7.3% (est. 7.0%).

Highlights from the management commentary

* JLR demand outlook- Some of the markets, such as EU and the UK, are under pressure. North America is improving and demand in China is stable. The current order book stands at ~133k units vs. ~150k units in 3QFY24. The pre-Covid order backlog was ~110k units.

* FY25 EBIT margin likely to remain in the similar range over FY24 (8.5%): VME and FME (variable and fixed market expense) are likely to increase as the company plans to invest in demand generation. This is likely to be offset by a full year of increased capacity of RR and RR Sport. However, the management retains its FY26 EBIT margin guidance of 10%.

* CVs- Volumes are likely to remain flat or decline YoY in FY25. Expects 1Q to be slow and demand likely to recover from 2Q onward. The management has indicated that commodity costs are now firming up and TTMT expects cost pressure in 1Q and beyond. TTMT plans to offset this through price hikes.

* PVs- Industry growth rate is likely to moderate to under 5% YoY in FY25 as pentup demand is exhausted and due to a high base (strong volume growth seen in both FY23/FY24). Also, the possibility of refilling the channel is very low. EBITDA margin for PV (ICE business) stood at 9.4% in FY24 vs. 8.5% in FY23. EBITDA margin for EVs stood at -1.4% in FY24 vs. -0.5% in FY23.

Valuation and view

* We expect JLR margins to remain stable over FY24-26, given: 1) rising cost pressure as it invests in demand generation, 2) normalizing mix, and 3) EV rampup, which is likely to be margin dilutive. Even in India business, both CV and PV businesses are seeing moderation in demand. We have factored in flat margins for India business over our forecast period.

*  We had recently downgraded TTMT to Neutral (from BUY earlier) and our key arguments at that time were: 1) JLR margins are unlikely to improve from here given anticipated rising cost pressures and normalizing mix, and 2) a weak outlook for India business. These factors are now playing out in line with our expectation. While there is no doubt that TTMT has delivered an extremely robust performance across its key segments in FY24, there are clear headwinds ahead that could hurt its performance. We have lowered our EPS estimates by 3%/5% over FY25/FY26. The stock trades at 18x/15.6x FY25E/FY26E consolidated EPS and 6.2x/5.3x EV/EBITDA. Reiterate Neutral with our FY26E SOTP-based TP of INR955 (from INR970 earlier).

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