Q2FY24 Review: Tata Motors: In-line Q2; Well-placed for a strong H2FY24

3 Nov 2023 , 11:31 AM

Tata Motors’ Q2 consol. Ebitda was in line with analysts of IIFL Capital Services estimates, with miss in JLR (lower ASP, temporary) offset by higher margins in India. The India business is low on volume growth this year (volumes flat YoY in Apr-Oct). However, earnings growth is strong due to margin normalisation (pricing, fall in input costs). JLR’s results reflect higher production against a large order-book, with strong pricing. Mgmt. increased Ebit margin guidance for JLR from ~6% to ~8% (already in analysts of IIFL Capital Services est.), while reiterating FCF guidance of GBP2.0bn. Overall, analysts of IIFL Capital Services expect a strong H2FY24 for Tata Motors both in terms of earnings and FCF. JLR would benefit from seasonal pick-up and better supply-side dynamics for RR/RR Sport. India business would also benefit from seasonality and operating leverage. Analysts of IIFL Capital Services largely maintain their earnings estimates. Retain BUY with TP of Rs765 (20% upside). 

Strong India offsets revenue miss in JLR: 

JLR Ebitda missed analysts of IIFL Capital Services est. by 5% due to 4% QoQ fall in realisations (weak mix). Ebitda margin contracted 140bp QoQ (20bp miss) due to weak mix and reversal of inventory-related benefit in Q1 (expected). India revenue grew 12% YoY on flat volumes. However, Ebitda margin improved 400bp YoY/200bp QoQ to 9.0% (120bp beat), due to higher pricing and lower input costs. Standalone Ebitda beat analysts of IIFL Capital Services est. by 13%. Consol. Ebitda was in line. 

India volume growth has softened; margins driving earnings: 

Tata Motors’ volume growth has been flat YoY in Apr-Oct; analysts of IIFL Capital Services forecast 3% for the full-year. This reflects slowdown in volume growth of both PV and CV industry (mid-to-high single-digit in FY24). Tata Motors’ market-share in both PV and CV are slightly down vs FY23. However, margin performance is strong and making up for lack of volume growth. 

JLR’s Q2 weakness temporary; expect a strong H2 on earnings and FCF:

The weakness in JLR’s ASP and margins are due to temporary factors (lower production due to summer shutdown, weaker mix of RR). Overall production will pick up in H2FY24. JLR is also expected to ramp up production of RR/RR Sport from current levels. These will result in higher volumes, margins and FCF in H2FY24. Order-book is strong at 168k at the end of Q2, equivalent to more than 5 months’ sales. Although marketing spend may increase, it would be offset by operating leverage and lower input costs. Mgmt. also reiterated FY26 Ebit margin guidance of 10%.