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Multiple headwinds ahead

* Tata Motors (TTMT) reported a strong consolidated performance in 1QFY25, with margins expanding ~110bp YoY to 14.4% (est. 13.3%), driven by JLR and strong India CV business margins even as India PV margin missed estimates. Margins were also supported by higher capitalization rate (1Q at 6.2% of revenues v/s 4.6% YoY). However, apart from the risks from subdued global demand and margin headwinds at JLR, recent supplier based constraint may pose as an incremental headwind in the near-term. This, coupled with demand moderation in its India CV and PV businesses, raises concerns about TTMT’s ability to sustain the currentlevel of profitability going forward.

* We raise our EPS estimates by 3%/4% for FY25/FY26. The stock trades at 19.1x/16.4x FY25E/FY26E consol. EPS and 7x/5.7x EV/EBITDA. Reiterate Neutral with Jun’26E SOTP-based TP of INR1,025.

Net debt grew INR26b due to dividend payments and seasonality

* Consolidated business: 1QFY25 consol. revenue/EBITDA/PAT grew ~6%/14%/46% YoY to INR1080.5b/INR155.1b/INR55.3b (est. INR1033.6b/INR137.6b/INR41.1b). It reported EBITDA margin of 14.4%, up 110bp YoY (est. 13.3%). Consol FCFF stood at INR12b (vs. INR25b in 1QFY24). Net auto debt increased by INR26b in 1QFY25 to INR186b due to dividend payments and seasonality impact.

* JLR: Volumes (incl. JV) grew 4% YoY to 110.5k units (est. 109.7k). Net realizations improved 0.5% YoY/4.3% QoQ to GBP74.4k/unit (est. GBP70.9k). EBITDA margins contracted 50bpYoY/QoQ at 15.8% (est. 15.4%) despite a favorable product mix due to rising VME / FME expenses. However, EBIT margin improved 30bp YoY to 8.9%, (est. 7.5%) due to lower depreciation.

* TTMT CV business: Revenue grew ~5% YoY to INR178.5b (est. INR179.8b), led by volume growth of ~6% YoY. ASP declined 0.8% YoY/ 1.7% QoQ to INR1.91m (est. INR1.92m). ASP decline was due to lower salience of MHCV and as there was a shift from multi-axle vehicles to tractor trailers. EBITDA margins expanded 220bp YoY (-30bp QoQ) to 11.6%, led by material cost savings.

* TTMT PV business: Revenue declined 8% YoY to INR118.9b (est. INR128.6b), led by 1% YoY decline in volumes and 7% YoY decline in realizations at INR856.8k/unit (est. INR927k). EBITDA margins expanded 60bp YoY (-150bp QoQ) to 5.8% (est. 7%), led by material cost reductions. However, margin miss relative to estimates have been due to rising discounts.

Highlights from the management commentary

* JLR demand outlook- Some of the markets, such as EU and China, are under pressure. North America is improving and demand in the UK is recovering. The current order book stands at ~104k units vs. ~133k units in 4QFY24 and 150k units in 3QFY24.

* EBIT margin guidance maintained: VME and FME (variable and fixed market expenses) are likely to increase as the company plans to invest in demand generation. Further, JLR is expected to face incremental production constraints in 2Q and 3Q due to floods at a key aluminum supplier. Management hopes to minimise the impact by sourcing from alternate suppliers. Overall, it has maintained stable margin guidance for FY25E and retains its FY26 EBIT margin guidance of 10%.

* CVs: While CV demand till July has been weak, it is expected to bounce back in 2HFY25 as structural demand drivers remain intact. We expect TTMT’s India CV business to see a 4% CAGR (FY24-26E).

* PVs: Channel inventory for TTMT stood at 35-40 days (vs 30 days normally). EBITDA margin for ICE stood at 8.5% in 1QFY25 vs 8.6% in 1QFY24.

Valuation and view

* We expect JLR margins to see limited expansion over FY24-26, given: 1) rising cost pressure as it invests in demand generation, 2) normalizing mix, and 3) EV ramp-up, which is likely to be margin dilutive. It’s recent supplier based constraint may pose as an incremental headwind in the near-term. Even in India business, both CV and PV businesses are seeing moderation in demand.

* While there is no doubt that TTMT delivered an extremely robust performance across its key segments in FY24, there are clear headwinds ahead that could hurt its performance. We raise our EPS estimates by 3%/4% for FY25/FY26. The stock trades at 19.1x/16.4x FY25E/FY26E consol EPS and 7.0x/5.7x EV/EBITDA. Reiterate Neutral with Jun’26E SOTP-based TP of INR1,025.

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