Analyst Corner: Tata Motors – Downgrade to ‘sell’ with lower FV of Rs 90

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Published: June 17, 2020 2:45 AM

We see limited visibility of the company reporting profits anytime soon due to a weak outlook on volumes and thus we downgrade the stock to ‘sell’ (from ‘buy’ earlier) and revise fair value to Rs 90 (from Rs 130).

Realised hedge losses came in at GBP112 million versus our estimates of GBP150 million in Q4FY20.Realised hedge losses came in at GBP112 million versus our estimates of GBP150 million in Q4FY20.

Desperate measures. Tata Motors reported a consolidated loss of Rs 9,890 crore impacted by Covid-led disruption and a high fixed cost structure. Substantial pick-up in volumes is essential for the company to return to profitability, despite the management’s efforts to cut costs. We see limited visibility of the company reporting profits anytime soon due to a weak outlook on volumes and thus we downgrade the stock to ‘sell’ (from ‘buy’ earlier) and revise fair value to Rs 90 (from Rs 130).

JLR reported an Ebitda of GBP259 million (-63% year-on-year) in Q4FY20, 52% below our estimate of GBP537 million, primarily due to lower net realisations and higher-than-expected other expenses. Adjusting for loss on revaluation of working capital, other expenses increased 10% quarter-on-quarter despite a 13% q-o-q decline in volumes and the company achieving cost savings of GBP170 million in manufacturing and overheads during Q4FY20. Reported Ebitda margin was 4.8% in Q4FY20 (down 500 bps y-o-y) compared with our estimate of 9.1%. ASPs declined by 9% q-o-q due to an unfavourable geographical mix (lower China mix), increase in variable marketing expenses due to high dealer inventory and an unfavourable product mix (lower mix of Land Rover) in Q4FY20. Realised hedge losses came in at GBP112 million versus our estimates of GBP150 million in Q4FY20.

The standalone business reported an Ebitda loss of Rs 960 crore (KIE: loss of Rs 440 crore) in Q4FY20 due to lower wholesale volumes because of inventory correction, an adverse product mix as M&HCV volumes fell by 43% y-o-y, 220 bps y-o-y decline in gross margin (KIE: 60 bps y-o-y decline) mostly due to higher discounting and impact of Covid-19 during the month of March 2020.

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