Q4FY23 Review: Tata Motors: Strong Q4 lends confidence to FY24 forecasts

15 May 2023 , 11:17 AM

Tata Motors’ Q4 results (although in-line) were strong with margin expansion in JLR and India, on the back on sharp volume uptick. In FY24, India growth may be soft due to deceleration in PV & LCV industries. MHCV industry would be weak in Q1FY24 (reversal of pre-buy effect), but should pick up from 2Q. Mgmt’s FY24 guidance for JLR implies improvement in volumes (400k), Ebit margin (>6.0%) and cash-flows (>GBP2.0bn FCF). These guidance parameters are largely in line with analysts’ of IIFL Capital Services pre-existing estimates. Yet, the strong Q4 results and positive commentary has improved the confidence on IFL Securities estimates, after two years of disappointments. 

Strong Q4 performance in JLR and India: 

JLR revenue grew 18% QoQ on 19% QoQ improvement in volumes. Ebitda margin improved 270bp QoQ to 14.6%, an 8-quarter high. India also had a strong Q4 due to seasonal uptick in PV/CV volumes, combined with better pricing discipline in MHCV industry. Revenue grew 16% YoY and 17% QoQ. Ebitda margin improved 290bp YoY and 120bp QoQ to 9.2%.

India volume growth may be soft in FY24: 

Mgmt mentioned that the PV and LCV industries are likely to see sharp moderation in growth due to high-base effect of FY23 and macro headwinds (inflation, interest rates). MHCV industry is likely to clock YoY decline in Q1FY24 due to reversal of pre-buy effect in Q4FY23. However, mgmt is hopeful of pick-up in MHCV from Q2. In both PV and CV, mgmt targets improving margins to double digits with better pricing and cost efficiencies. 

JLR to see strong ramp-up in FY24: 

Mgmt FY24 guidance for JLR stood at around 400k volumes (FY23: 321k; Q4FY23: 95k), Ebit margin of >6.0% (FY23: 2.4%; Q4FY23: 6.5%) and FCF of >GBP2.0bn. The above guidance implies high growth & FCF in FY24, but are in line with analysts’ of IIFL Capital Services preexisting estimates. JLR’s order-book came off from 215k (Dec-2022) to 200k (Mar-2023), implying a net order-flow of 75k in Q4FY23 (lower than retails of 90k). This is not a concern now (large order-book) but may need intervention by way of marketing costs/incentives in future.

Analysts of IIFL Capital Services consol. Ebitda and PAT estimates are largely unchanged. However, they have increased their valuation multiple for JLR from 2.0 EV/Ebitda to 2.5x, in view of the strong FCF outlook. Retain BUY with TP of Rs595 (earlier Rs540).