Tata Motors Rating ‘Reduce’; JLR results beat consensus estimates

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Q3FY21 FCF at Rs 79 bn (JLR: GBP562 mn, India: Rs 22 bn) was helped by working capital reversals (GBP264mn+Rs 22 bn).

JLR’s Q3FY21 adj Ebitda at GBP855 mn (14.4% margin) was broadly in line with our estimate of GBP885 mn (14.3% margin). Margins were up by GBP55 mn/ GBP36 mn reversal of provision/residual value. We had expected results to beat consensus due to strong Land Rover mix. For India, Ebitda margin at 5.8% (Nom: 6.2%) was also in line. Q3FY21 FCF at Rs 79 bn (JLR: GBP562 mn, India: Rs 22 bn) was helped by working capital reversals (GBP264mn+Rs 22 bn). CV/PV Ebitda margins were at 8%/3.8%.

Commentary: India: CV business momentum is improving. In PVs, TTMT plans to achieve double-digit market share with the launch of Safari and Hornbill. Material cost increases will come through in Q4FY21F. JLR: Q4FY21F margins could be lower than Q3FY21 as the mix of Jaguar normalises, in our view. JLR will continue to operate at 4% + Ebit margins and remain FCF-positive.

India: Given our view on the CV cycle, we raise our Medium, Heavy Commercial Vehicle (MHCV) growth estimates to +80/+25/+15% (up 20/7/7%) over FY22-24F) and Ebitda margins at 6.1/8.0/8.2% (vs 5.9/7.5/7.7%). We also raise PV volumes to 320k/354k vs 213k/234k over FY22-23F. Overall, we raise Ebitda estimates by 21-22%.

JLR: We revise our volume estimates to 435k/577k/604k over FY21-23F (vs 477k/536k/ 594k), as we expect a stronger rebound in FY22F post a weaker FY21F. Global car supply is expected to remain tight in the near term and JLR inventories are lean. Hence, we raise our Ebitda margins by 150bp/60bp to 14% /14% over FY22-23F, leading to 28%/11% higher Ebitda.

Valuation: higher SOTP-based target price of Rs 244
With higher Ebitda assumptions, we expect net auto debt to reduce to ~Rs 290 bn by FY23F (vs Rs 535 bn earlier). With improved debt position and improvement for luxury peer multiples, we now value JLR at 1.75x FY23F EV/Ebitda (1.5x earlier). We value domestic business at 8x FY24F Ebitda discounted back to FY23F and subs at Rs 71/sh. The stock is trading at 3x FY23F EV-Ebitda, which is expensive, in our view.

We remain concerned about competition’s battery EV pipeline and investments in autonomous driving where JLR lags. While short term margins may remain strong, we believe margins have peaked. Any rise in competition can impact earnings sharply. We prefer MM (MM IN, Buy) and AL (AL IN, Buy) in the OEM space.

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