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Growth outlook remains weak across all key segments

JLR likely to see persistent margin pressure ahead

*In 3QFY25, while JLR's EBIT margins improved YoY to 9%, we note here that the bulk of its margin improvement has been driven by a reduction in depreciation. Further, margins in India CV and PV businesses were boosted by PLI accruals for 9M, which aided margins by 90bp and 150bp for these segments, respectively.

*We expect margin pressure to persist at JLR over FY24-27E, given: 1) weak demand in key regions, 2) rising cost pressure as it invests in demand generation, and 3) EV ramp-up, which is likely to be margin-dilutive. Even in India, both CV and PV businesses are seeing a moderation in demand. We cut our EBITDA estimates for Tata Motors (TTMT) by 3%/5% over FY25/FY26 to factor in the weakness in JLR business. For lack of any triggers, we reiterate our Neutral rating with a Dec’26E SoTP-based TP of INR755.

JLR’s EBIT margin expansion primarily led by reduced depreciation

*Consolidated business: 3QFY25 consol. revenue grew 3% YoY at INR1.13t (in line), while EBITDA/PAT declined 15%/23% YoY to INR130.3b/54.7b (est. INR147.5b/65.5b). Its 9MFY25 revenue grew 2% YoY, but EBITDA/PAT dipped 5.5%/3.0% YoY. Net auto debt declined to INR192b as of Dec’24 vis-à-vis INR220b as of Sep’24.

*JLR: Volumes (incl. JV) declined 2% YoY to 111.2k (est. 114k units). Net realization was down 2% YoY/3% QoQ at GBP71.7k/unit (est. GBP74.5k). EBITDA margin dipped 200bp YoY to 14.2% (est. 13.5%), while EBIT margin expanded 20bp YoY to 9% (est. 7.6%). However, we note here that the bulk of its EBIT margin expansion was due to lower depreciation and higher capitalization rates. Depreciation is likely to remain stable at these levels for the next three quarters. It will again start rising with the launch of their new EVs from 4QFY26 onwards.

*TTMT’s CV business: Revenue declined 8% YoY to INR186.6b (est. INR202.1b), led by an ASP decline of 7% YoY to INR1.89m (est. INR2.05m), while volumes were largely flattish YoY. CV segment margins have improved 130bp YoY (+150bp QoQ) to 12.2% (est. 11.6%), 90bp of which was driven by the accrual of PLI benefits for 9M.

*TTMT’s PV business: Revenue declined 3% YoY to INR126.2b (in line), led by 1% YoY volume growth, offset by a 4% YoY decline in ASP at INR902.2k (est. INR906.7k). EBITDA margin expanded 110bp YoY (+140bp QoQ) to 7.6% (est. 6.4%). PV ICE segment’s margin was down 100bp YoY due to a decline in ASP. PLI benefits accrued in the EV segment had a 150bp positive impact in 3Q. Without this, the EV segment would have been EBITDA break-even in 3Q.

Highlights from the management commentary

*JLR: Management has maintained its EBIT margin guidance for FY25 at 8.5%. This translates into a 10.2% (vs. 9.2% YoY) EBIT margin for 4Q – which we think is a tough ask, especially in the current adverse macro in its key markets. Management may have, however, lowered its revenue and RoCE guidance for FY25E due to the ongoing slowdown in China. It intends to reaffirm its FY26 guidance at the annual event post-4QFY25.

*Indian CV: 4Q CV volumes are expected to be flat YoY after a decline posted for 9MFY25. This itself is expected to be a positive outcome and would set a good base for growth for FY26. Management believes there are positive tailwinds for the sector, which include improving fleet operator profitability led by improving utilization levels and higher freight rates.

*Indian PV: Management expects the PV industry to post 2% YoY growth in FY25E, in line with the trend for 9M. TTMT PV business was able to improve market share by 70bp on a QoQ basis in retail terms in 3Q. Dealer inventory has now been reduced to less than 25 days.

*The demerger of PV and CV businesses is on track with the appointed date for the same as 1st Jul’25, subject to all approvals.

Valuation and view

*While management has maintained its guidance for JLR for FY25E, we believe the asking rate of 10.2% EBIT margin for 4QFY25 is tough to achieve, given the current adverse macro environment. We expect margin pressure to persist at JLR over FY24-27, given: 1) weak demand in key regions, 2) rising cost pressure as it invests in demand generation, and 3) EV ramp-up, which is likely to be margin-dilutive.

*Even in India, both CV and PV businesses are seeing a moderation in demand. We have lowered our EBITDA estimates for TTMT by 3%/5% over FY25/FY26 to factor in weakness in the JLR business. For lack of any triggers, we reiterate our Neutral rating with a Dec’26E SoTP-based TP of INR755.

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