Tata Motors-JLR: Low growth, high margin, high FCF

13 Jun 2023 , 11:31 AM

Recommendation: Buy; Target Price: Rs 595

 

Analysts of IIFL Capital Services attended JLR’s Investor Day yesterday. JLR had shifted to a ‘profit-over-volume’ approach in 2020. Now, with volume normalisation post-Covid and chip shortage, it has scaled up to a level from where growth may flatten. Mgmt’s FY24 rev guidance of >GBP28bn is similar to the Q4FY23 run-rate. FY26 rev guidance implies low-to-mid single-digit Cagr over FY24-FY26. Margin improvement target from 6%+ in FY24 to 10%+ in FY26 may find support from discontinuation of low-margin Jaguars. Analysts of IIFL Capital Services are positive on FY24/FY25 margin/FCF outlook, but sceptical beyond FY25. Key concerns include: i) Weak demand for models excl. RR, RR Sport, Defender; ii) Margin sustainability once the shine of All New RR, RR Sport, Defender wears off; iii) Profitability of BEVs.

Moderation in volume and growth aspirations: 

In FY18, JLR’s sales (incl. China JV) was 633k and global capacity was inching towards 1mn. Volume scale-up and entry into low-priced segments hurt mix, margins and cash-flows. Starting 2020, JLR changed its strategy, prioritizing profits over volumes. At its Investor Day, JLR’s mgmt reiterated the stance. FY24 volume guidance (excl. China JV) is ~400k with very little growth seen over FY24-FY26 (FY26 rev guidance >GBP30bn vs >GBP28bn in FY24). Existing Jaguar models (43k units, ex-JV) would be discontinued. Volume aspiration from Jaguar EVs appears low at sub-30k.

Focus on ASP, margins and FCF: 

Culling of low-priced models and focus on premiumisation have led to sharp rise in ASP (GBP71k in FY23 vs GBP48k in FY20). Ebit margin improved from 0% in FY20 to 6.5% in 4QFY23. Mgmt targets improving Ebit margin to >10.0% in FY26. Analysts of IIFL Capital Services believe about half of the margin improvement would come from discontinuation of existing Jaguar models, and the remaining from cost optimisation. With higher margins, FCF generation is also likely to improve. Mgmt targets FCF of more than GBP2bn in FY24.

Planning accelerated shift to EV: 

LR family will see BEV launches from 2024. The Jaguar brand will become all-electric in 2025. Overall, mgmt has guided to EV sales accounting for more than 80% of JLR sales in FY29 and 100% by FY36. Mgmt came across confident of re-positioning the Jaguar brand as a premium EV offering (price starting GBP100k). Analysts of IIFL Capital Services are a bit sceptical of customers’ willingness to pay high premium for Jaguar brand, as well as on overall profitability of JLR post transition to EVs.