Sell Tata Motors Passenger Vehicles Ltd For Target Rs.240 by Motilal Oswal Financial Services Ltd
Margins to remain under pressure in the near term
* Tata Motors Passenger Vehicles’ (TMPV) PBT came in at ~INR4.5b in 2QFY27 (in-line). JLR margins remained under pressure due to a sharp rise in VME and commodity costs and an inferior mix but were in line with our estimates, while despite strong volume growth, India business margins declined 190bp YoY to 3.8% vs est of 4.1%. Even net consolidated automotive debt increased to INR508b from INR422b QoQ, fully attributable to JLR.
* Considering the multiple headwinds in the JLR business from continued pressure from VME costs, commodity pressure, persistent softness in China demand and higher interest costs on account of increasing JLR debt, and the downward revision of FY27 margin guidance, coupled with the RM impact in the India business likely to keep the India margins under pressure in the near term, we cut our FY27/FY28 EPS estimates by 69%/5%. While India business has been gaining market share, margins remain under pressure given the adverse mix and rising input costs. Further, JLR continues to face multiple headwinds on the demand and cost fronts. While JLR has embarked on a major cost-reduction initiative, it is likely to only help partially offset the current headwinds. Given the significant challenges at JLR and the continued geopolitical uncertainty, we reiterate our Sell rating on the stock with SoTP-based TP of INR240 per share (based on FY28E). We value JLR and India PV business at 2x and 13x EV/EBITDA, respectively.
Margins remain under pressure, both at JLR and India PVs
* TMPV reported a consolidated adjusted profit of ~INR3b in 2Q, missing our estimated profit of INR4.4b.
* JLR volumes recovered in 2Q after facing supply constraints in 1Q, posting a healthy 23.3% YoY growth in volumes to 91.7k units. EBIT margins contracted to 1.1% in 2Q from 2.8% in 1Q, due to adverse mix and higher VME costs. 2Q included an exceptional expense of GBP530m related to payments for the voluntary redundancy program and impairment of assets. Adjusted for this, PBT still missed our estimates, coming in at GBP6m. JLR posted free cash outflow of GBP1.5b in 2Q due to margin pressure and seasonally adverse working capital.
* India business saw a strong 53% YoY increase in revenue to INR210b (in line), led by an impressive 40% YoY growth in volumes. However, despite robust volume growth, margins fell 190bp YoY to 3.8% (vs. our est. 4.1%). Margins were under pressure due to the surge in input costs and a rising EV mix. As a result, PBT stood at INR260m (vs. est. INR622).
* Net consolidated automotive debt further increased to INR508b from INR422b QoQ, with the entire debt attributed to JLR. Indian business continues to be net cash.
Highlights from the management commentary
* JLR is targeting 10% annual revenue growth through its existing portfolio and upcoming product launches. FY27 guidance has been revised to EBIT margin of 2-3% vs 4% earlier and cash outflow of ~GBP1.25b vs breakeven earlier, reflecting weaker-than-expected market conditions, particularly in China. Management targets double-digit EBITDA margins and positive cash generation in FY28, with a return to net cash by FY30.
* Management remains positive on India H2 demand, supported by a healthy order pipeline, strong product portfolio and upcoming launches. However, industry growth is expected to moderate against a high base following GST 2.0.
* Management plans to increase monthly EV production from ~16k units to ~20k units over the next 2-3 months to address the demand-supply gap. EV penetration is expected to increase to 25% or slightly higher next year. * Commodity pressures are expected to remain elevated in Q3, particularly from steel, rubber and copper, partly offset by softening precious metal prices. The company has offset ~40% of the commodity inflation through calibrated price increases and cost reduction initiatives, absorbing the balance. Management expects the commodity cost curve to plateau in Q4.
* TMPV has taken cumulative price increases of ~1.7% across three hikes in Apr, Jul and Sept’26. Further calibrated price increases are expected, with a potential hike in Q3 and a more certain increase in Q4. Management intends to balance pricing actions with cost reduction initiatives to protect demand and profitability.
Valuation and view
Considering the multiple headwinds in the JLR business from continued pressure from VME costs, commodity pressure, persistent softness in China demand and higher interest costs on account of increasing JLR debt, and the downward revision of FY27 margin guidance, coupled with the RM impact in the India business likely to keep the India margins under pressure in the near term, we cut our FY27/FY28 EPS estimates by 69%/5%. While India business has been gaining market share, margins remain under pressure given the adverse mix and rising input costs. Further, JLR continues to face multiple headwinds on the demand and cost fronts. While JLR has embarked on a major cost-reduction initiative, it is likely to only help partially offset the current headwinds. Given the significant challenges at JLR and the continued geopolitical uncertainty, we reiterate our Sell rating on the stock with SoTP-based TP of INR240 per share (based on FY28E). We value JLR and India PV business at 2x and 13x EV/EBITDA, respectively.
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