Tata Motors Rating ‘Buy’; company managed Q3 well amidst challenges

Despite limited wholesale volume of ~69k (up ~10% q-o-q) units led by chip shortage, JLR managed Q3FY22 pretty well to focus on higher margin models like RR (39% mix, up 900bps q-o-q) and deliver ~300bps q-o-q better Ebitda margin at 12%. Thus, with limited capex (~GBP 0.5 bn) and improved profitability, JLR was able to generate positive FCF of GBP164 mn and in turn help Tata Motors (TTMT) reduce net auto debt by Rs 40 bn QoQ to Rs 600 bn. With production improving, we expect mix to normalise, resulting in rationalisation in realisation and gross margin. Also, with better production, we expect scope for reversal in JLR working capital by ~GBP1.4 bn across FY23e.

In domestic business, CV margin (~2.6%) was severely impacted by higher commodity cost despite improving scale, as against PV business adjusted Ebitda margin coming in at 6.2%. We believe TTMT would benefit from CV upcycle (expect ~21% CAGR for industry over FY22-FY25e) pushing margin up. In domestic PVs, TTMT reached a decadal-high market share (Q3FY22: 13%) and is also leading in electrification (EV market share of ~82%). Maintain Buy with revised target price of Rs 703 (earlier: Rs 653), implying 2.5x/12x JLR/standalone FY24e EV/Ebitda.

Key takeaways from conference call: Management indicated (i) refocus programme to surpass earlier target of EUR 1 bn to reach EUR1.4 bn in savings in FY22 through a mix of market performance and investment savings; warranty spends have reduced to 1.6% and targeted at <3% for FY22; (ii) despite high input commodity costs, higher expenses for pre-CY18 model quality campaigns and elevated R&D expensing at 70% (vs 20% 2 years back), JLR achieved Ebitda margin of 12% on a scale of ~70k units in quarter; higher mix of superior margin for RR (up 900bps q-o-q to 39%) and ~200bps higher China market mix q-o-q drove ASP and gross margin up.

These would normalise with rising production and diversification of portfolio ahead. (iii) In India PV segment, over the next 5 years, EV mix is expected to reach ~20% from ~6-8% now and diesel to come down to 10%, with petrol and CNG at 50%, 20% respectively; (iv) India CV business is expected to improve margin in Q4 led by stability in steel prices and lagged gradual price hikes. Despite freight rates firming up and large fleet owners driving up CV demand, industry cannot take steep price hikes in a short time span to remain gross margin neutral; (v) PVs adjusted for one-offs (subsidiarisation cost of the PV business), reported ~6.2% Ebitda margin and would move further and reach ~8% in Q4 itself; (vi) company expects negative FCF of ~GBP1.4 bn in FY22e for JLR, fully led by adverse working capital on account of lower production. Maintaining outlook of GBP2.5 bn capex in FY23e.