Analyst Corner: Maintain ‘buy’ on Tata Motors; JLR pivots to EVs

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March 2, 2021 2:45 AM

Jaguar brand will be positioned as an all-electric (by FY25) modern luxury brand with focus on radical design and best-in-class technology to attract a younger customer base vis-à-vis its past. The management also expects ~60% Land Rover sales to come from electric segment by FY30, while in the next 12-18 months, new model launches of RR/RR-Sport/Defender-130 are likely to drive growth.

We have raised our JLR EBIT margin estimate to 6.0% (earlier: 5.3%) for FY23, yet well below the management guidance of ≥7% EBIT margin in FY24.We have raised our JLR EBIT margin estimate to 6.0% (earlier: 5.3%) for FY23, yet well below the management guidance of ≥7% EBIT margin in FY24.

JLR’s management shared details of its electrification strategy at its annual investor day (Feb 26). The key takeaways include pivoting portfolio towards focussed luxury (away from mass luxury) with Jaguar pure BEV platform leading the technology transition; zero pure ICE model sales by FY26; platform consolidation (6 down to 3) will be key to creating quality, cost efficiency; thus, capex spend will be ~£2.5bn, to include all the required EV investment; and confident of achieving financial targets of ≥7%/10% EBIT margin by FY24/26, respectively. We were impressed by the coherent framework laid down by the management towards achieving customer delight via high quality aspirational EV products while keeping profitability at the centre of capital allocation. JLR is prioritising quality, technology over volumes (moving away from the Big-3 German players); we believe investors also need to include other luxury EV players (e.g. Lucid, Nio) for a holistic peer valuation analysis. Maintain BUY.

Further highlights of the event: Jaguar brand will be positioned as an all-electric (by FY25) modern luxury brand with focus on radical design and best-in-class technology to attract a younger customer base vis-à-vis its past. The management also expects ~60% Land Rover sales to come from electric segment by FY30, while in the next 12-18 months, new model launches of RR/RR-Sport/Defender-130 are likely to drive growth.

Refocus programme takes over from project Charge (generated lifetime savings of ~£6bn), and is designed to deliver incremental £2bn/4bn of cost reduction in next 3/5yrs, respectively. Few of these potential savings are likely tied up with platform improvements (e.g. reduced warranty, material costs) while other big-data analytics initiatives (InDigital) could significantly improve the quality of sales.

Capital investments will remain at ~£2.5bn till FY25 (FY26: ~£3bn), and will encompass the three new platforms (MLA Flex, EMA native BEV, Pure BEV) and other new technology investments. We believe the move away from ICE technologies towards future technologies (EVs, hydrogen) on investments could aid JLR’s terminal value.

The management clearly emphasised that its guidance on various financial targets has room for positive surprise: a) EBIT margin ≥7%/10% in FY24/26, respectively, zero net debt by FY24, c) strong FCF pre-restructuring costs FY22 onwards, FY26 revenue target of >£30bn (>8% CAGR FY21-26). We have raised our JLR EBIT margin estimate to 6.0% (earlier: 5.3%) for FY23, yet well below the management guidance of ≥7% EBIT margin in FY24.

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