Q1FY24 Review: Tata Motors: Strong JLR offsets weakness in India

26 Jul 2023 , 01:42 PM

Tata Motors’ Q1 Consol. Ebitda beat IIFL estimate by 4%, with 10% miss in India more than offset by 8% beat in JLR. India business is likely to report a soft FY24 from volume perspective, but commentary on margin (despite Q1 miss) is positive with pricing discipline and potential input cost benefit in coming quarters. JLR’s volume outlook is positive, given strong order book, as it reaps the benefit of a strong model pipeline in 2021/2022. Margin surprise is likely to sustain through FY24, with slight seasonal weakness in Q2, followed by a strong H2. FCF is likely to be strong; analysts of IIFL Capital Services expect Tata Motors to become net cash (excl. financing book) by FY25-end. They upgrade FY24/FY25 Consol. Ebitda by 11% and 4% (incl. 4% due to GBP-INR going up from 100 to 105). Retain BUY with TP of Rs750 (17% upside). Planned cancellation of “A” Shares would be 4% EPS accretive. 

Strong JLR offsets weakness in India: 

India revenue grew 8% YoY and came in 6% above analysts of IIFL Capital Services estimate. However, Ebitda margin disappointed, contracting 220bp QoQ to 7.0% (130bp below estimate). As a result, India Ebitda missed by 10%. JLR, on the other hand, surprised positively on margins (16.3% vs 14.8% est.), driving an 8% Ebitda beat. Part of the beat was due to accounting changes (20-30bp) and favourable impact of inventory accounting (production > sales). 

India volume story is soft, margins to drive earnings: 

Analysts of IIFL Capital Services forecast only 3% volume growth for the India business in FY24, with deceleration in industry growth and market-share loss in CV. Despite the miss in margins in Q1, management is confident of improvement in the coming quarters, with pricing discipline, fall in input costs and operating leverage. As a result, analysts of IIFL Capital Services have largely maintained their India Ebitda estimates for FY24/FY25. They are wary of price competition in MHCVs, given the sharp market-share loss for Tata Motors in recent quarters.

JLR looks good for FY24 and possibly even for FY25: 

JLR is on track to meet FY24 volume guidance of 400k (+25% YoY, ex China JV). Growth may slow in FY25/FY26, as order book of new models depletes and as Jaguar ICE models are run down. Margin is likely to stay strong in FY24, given the strength in pricing. Although marketing costs may go up, the same may be offset by fall in input costs. The challenge for JLR would be to maintain margins when transition to EVs commences in FY26.