Tata motors reported better than-expected Q4FY17 results led by sequential improvement in both standalone and JLR businesses. Operating leverage benefit, lower hedge losses in JLR and higher-than expected revenues in standalone business led to the positive surprise. We expect gradual improvement in JLR Ebitda margin as forex hedge rate comes closer to spot rates in the next two years. Volume growth will likely remain strong led by fresh and young model line-up. We maintain Buy rating on attractive valuations and increase our target price to Rs560 on increase in earnings estimates for FY2019.
Strong improvement in JLR profitability on sequential basis
JLR reported Q4FY17 Ebitda of £1.06 bn, which was 2% ahead of our estimates as lower-than-expected revenue growth was offset by higher profitability. Revenues came in at £7.7 bn, which was up 16% y-o-y led by 6% y-o-y volume growth and 10% due to increase in net realisations aided by currency benefits. Ebitda margin was 13.8% as compared to our estimate of 13%. Outperformance in Ebitda margin was led by lower realised hedge book losses, which came in at £400m as compared to our estimate of £472m.
The profitability of the China JV remained strong with JLR’s share of profit at £46m in Q4FY17. Adjusted net profit came in at £530m, which was 8% above our estimate; outperformance at net profit level was led by lower-than-expected tax rate. Standalone business reported an Ebitda of Rs3.6 bn, which was ahead of our estimates due to stronger-than expected revenue growth and higher profitability. Ebitda margin came in at 2.7%; up 210 bps q-o-q led by 290 bps expansion in gross margin.
Volume growth outlook for JLR remains strong; Ebitda margin will improve in FY2019e
We expect JLR to deliver 12% volume CAGR over FY2017-20E led by (i) strong demand of FPace and Discovery Sport, (ii) ramp-up of production of new Discovery and (iii) launch of new models such as Ranger Rover Velar and I-Pace, electric vehicle in CY2018. The company has given Ebit margin guidance of 8-10% over the medium term; we build in
7-9% margin in our estimates despite currency benefits, which will accrue over the next two years. JLR will likely increase incentive to improve its market share. Fine-tune earnings estimates; maintain BUY with revised target price of Rs560 We have cut our FY2018e consolidated EPS estimates by 5% led by 40 bps cut in JLR’s Ebitda margin and higher depreciation expenses. For FY2019e, we have increased our consolidated EPS estimates by 3% due to 5% increase in volume estimates for JLR business as we build in IPace volumes in our estimates.
JLR: Q4FY17 results marginally ahead of our estimates
JLR reported Q4FY17 Ebitda of £1.06 bn, which was 2.3% ahead of our estimates as lower-than-expected revenue growth was offset by higher profitability aided by lower forex losses. Revenues came in at £7.7 bn, which was up 16% y-o-y led by 6% y-o-y volume growth and 10% due to increase in net realisations aided by currency benefits. Adjusted revenues were 3% below our estimates due to 3% q-o-q decline in net realisations possibly due to lower China mix and slight GBP appreciation versus USD. Ebitda margin for the quarter was 13.8% as compared to our estimate of 13%.