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Tata Motors rating – Buy: Operational numbers in line with consensus

The domestic CV market leader (TTMT) would benefit from the segment’s multi-year growth story (expect >30% CAGR for industry over FY21-24E).

Tata Motors’ (TTMT’s) Q1FY22 operational performance was in line with consensus estimates with consolidated EBITDA margin at 7.9% (down 646bps QoQ), driven by resilient margin performance in domestic PV (~4%) / CV (0.1%) and JLR (9%). Cash outflow (~GBP1 bn) was working capital (WC) led (~GBP 922 mn) as cash breakeven levels have been further reduced to ~90k units (earlier:100k units). The WC outflow is likely to be reversed in H2. The domestic CV market leader (TTMT) would benefit from the segment’s multi-year growth story (expect >30% CAGR for industry over FY21-24E).

On domestic PV front, TTMT has reached double-digit ICE market share (after 9 years) and is also leading the electrification charge in India via an ecosystem (collaborative) approach: a) products (10 new launches by CY25), b) charging infra with Tata Power, c) battery localisation. Maintain Buy.

Key highlights of the quarter: Standalone revenues fell ~41% QoQ to ~Rs 119 bn while JLR revenues declined ~24% to ~GBP5 bn (ASP’s rose ~10% QoQ to ~GBP58.8k/unit).

JLR is working closely with both the chip manufacturers and Tier-I vendors to increase supplies (Q2 volume target has been raised by ~5k units to ~65k units vis-à-vis early July’21 guidance). India CV/PV businesses clocked EBITDA margins of 0.1%/4.1% as fixed cost reductions mitigated the steep negative operating leverage impact (Covid). Q1 tax outflow is largely due to non-recognition of deferred tax assets in key regions (e.g. UK) and would reverse as profits accrue.

Key takeaways from concall: Management indicated: a) refocus programme is starting to yield result with GBP150 mn in savings from mix and operational performance; the same is likely to increase as volume normalisation occurs in H2FY22;

b) JLR’s electrified powertrain contribution to volumes has risen to 66% (~8.5% BEV+PHEV) vis-à-vis 53% YoY; however, due to lack of chips they would unlikely be emission compliant in H1 as JLR is prioritising more profitable (SUVs) models;

c) cost-savings on VME and warranty is likely to cumulatively sustain at <10% (6.4% in Q1); in India business, commodity price pressures were mitigated via price increases of ~2% in PV and 5% in CV, and structured cost reductions programmes; d) EVs is the cornerstone of India PV strategy; and e) India PV inventory improved to 17 days from 6 days at FY21-end while industry is at ~30-45 days.

Maintain BUY: We believe continued market share gains in the domestic PV business, CV upcycle and TTMT’s delivery on FCF generation (aim is to be debt-free by FY23/FY24) would be key monitorables for investors. We believe consensus continues to undervalue the India business while ignoring the electric only capital allocation pivot made by JLR. We maintain our Buy rating with a revised SoTP-based TP of `513 (earlier: Rs 528).

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