Tata Motors’ Q2FY17 results were a miss on estimates. JLR margins, adjusted for all one-offs and hedging losses, were below the level expected from the currency boost. That said, a strong model cycle and theoretically strong margin picture from benign currency provides comfort. Domestic business results were weak and much will depend on pick up in M&HCV demand. Maintain Buy.
JLR’s Q2 results were weaker than forecast
Absolute Ebitda, at £615m, was c32% below our forecasts and margins c470 bps below JEFe. While ASP was broadly in-line, raw material costs (+200 bps vs JEFe) and other expenses (+400 bps vs JEFe) were both higher than forecast. While quarterly margins have been had to predict, margins, adjusted for one time expenses and hedging losses, at c16.7% are below the range we had expected it to reach. It is well possible that the company is reinvesting the currency bonanza into the business (new customer quality programme for e.g.). China JV margins also dropped (and still very healthy), but the company has been guiding this for a few quarters now. JLR’s model cycle, however, continues to remain strong. The new Discovery is set to go on sale early next year. New mid-sized Range Rover would follow later in the year. Land Rover sales growth ought to recover, boosted by these launches. Margin picture too is theoretically very strong, with the currency having moved even more favourably recently compared to Q2 average. The management maintained its stance that long-term margins would be in the 14-16% range.
Domestic business — weakness in M&HCV continues
Net sales was c2% below JEFe on account of lower ASPs. However, higher raw material costs, marginally offset by lower other expenses resulted in an Ebitda margin of c3% (c130 bps lower than JEFe). Absolute Ebitda at R3.1 bn was c32% below ests. Stand-alone business was impacted by de-growth in the M&HCV segment. The company is however positive about M&HCV demand in 2H17 on account of good monsoons, infrastructure spending and pre-buying before BS-IV adoption from 1st April 2017.
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. Tata Motors is also the third-largest player in the Indian passenger vehicle industry. Post the acquisition of Jaguar Land Rover in 2008, the company has presence in the global luxury market.