Q3FY23 Review: Tata Motors: Strong Q3; margin improvement in JLR & India

27 Jan 2023 , 12:39 PM

Tata Motors’ Q3 Consolidated Ebitda beat estimates of analysts at IIFL Capital Services by 11% led by improvement in ASP and margins (Ebitda margin up 310bp QoQ). JLR’s ASP, margins and FCF in Q3 reflected the benefit of higher volume and a richer mix. PV business margins at 6.0% (ex one-off) was in line. However, the CV business saw a sharp jump in margins (8.8% in Q3 vs 4.4% in Q2). JLR’s volumes (ex-China JV) were up only 6% QoQ, Ebitda jumped 32% QoQ. “RR + RR Sport + Defender” volume share increased from 45% in Q2 to 65% in Q3.

JLR’s volumes were so far constrained by supply-side rather than demand. As supply-side stress eases, we expect earnings and cash flows to reflect the strength of underlying demand and strong model cycle (Defender, RR, RR Sport). India results also surprised positively with sharp uptick in CV segment margins. This is a result of fall in commodities and improvement in industry pricing (lower discounts). Analysts at IIFL Capital Services expect volumes to improve further in Q4 and FY24; so will margins and FCF.

Mgmt guidance of 80k+ volumes in Q4 appears conservative (Q3 was 79.6k), given that mgmt. mentioned Jan run-rate implies more than 85k for the quarter. We expect the mix to improve further with 10-15% increase planned in production of “RR + RR Sport”. Higher volumes (QoQ) and better mix should push up margins higher vs Q3. FCF would stay positive. As production increases over the course of FY24 (mgmt. hinted at 40k monthly vol.), a large part of working capital hit in Q1FY22-Q3FY23 (GBP1.8bn) should reverse and release cash.

Analysts of IIFL Capital Services maintain buy with target price of Rs 545.