1. Jefferies rates Tata Motors as ‘Buy’, says volume outlook strong, but margins a concern

Jefferies rates Tata Motors as ‘Buy’, says volume outlook strong, but margins a concern

While JLR’s and MHCV and car business’ volume outlook are strong, margins remain a concern

By: | Published: February 20, 2017 4:31 AM
tata Run down of outgoing Discovery, discontinuance of Defender, higher production in China JV and fairly muted Range Rover volumes resulted in a 5% drop in wholesale volumes.

Tata Motors’ Q317 results were very weak, with JLR’s profitability deteriorating for the second quarter running. Per unit profit is the lowest it has been in several years, not all explainable by one-time costs (which keep recurring in some form or the other). JLR’s volume outlook remains strong but it is margins that would be in focus.

JLR’s numbers disappoint again: Run down of outgoing Discovery, discontinuance of Defender, higher production in China JV and fairly muted Range Rover volumes resulted in a 5% drop in wholesale volumes. ASPs benefited massively from GBP depreciation, resulting in a 19% increase y-o-y, in line with forecasts. However, all cost items were higher than forecast—raw material cost due to weaker mix and higher incentives (50 bps higher q-o-q), employee costs due to one-time provisions (40 bps) and other expenses due to new model launch cost (30 bps) as well as a bloated hedging loss. Reported Ebitda declined 27% y-o-y and was 30% below our forecasts. Per Unit Ebitda was the lowest on record.

Adjusted margins were also weak: GBP depreciation ultimately helps JLR’s profitability but much of near-term exposure has been hedged at unfavourable rates. Even adjusted for the hedging loss (c700 bps of sales), underlying Ebitda margin was c16.3%, lower than the c18% we were expecting. Many of the costs that the management has called out as onetime are normal business expenses bunched up in Q3. The management commentary on margins in coming quarters suggests an improvement but mildly so.

jlr

Domestic business weak as expected: Domestic business is barely profitable at the Ebitda level. While recovery in the car volumes is impressive, it is coming at the expense of margins. Ebitda declined 83% y-o-y and margins were at 0.7% (150 bps below forecast). Near-term volume outlook for MHCV is strong due to upcoming emission norm changes. Car business is likely to do well too on the back of successful new model roll out. However, margin is the key concern.

Company description: Tata Motors is a multinational automotive corporation and is part of the Tata Group. It is India’s largest automobile company and is the leader in commercial vehicles. The company is the world’s fourth largest truck manufacturer, and the world’s third largest bus manufacturer. It is also the third-largest player in the Indian passenger vehicle industry. Post the acquisition of Jaguar Land Rover, the company now has presence in the global luxury market.

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