Tata Motors (TTMT) has given an update of the impact of the coronavirus on JLR and the India business in a recent press release. While TTMT’s China business of JLR is expectedly down sharply, the company has started to see an impact in other markets as well. For FY20, it is indicating an Ebit margin level impact of 1 pp over guidance of ~3%. For the India business, it expects Q4FY20 to see further impact (due to coronavirus) on already expected weak performance due to BS6 transition. We are cutting our FY21E consolidated EPS by ~35% to factor in further impact of coronavirus in Q1FY21 for JLR and weaker-than-expected India CV business in FY21.
We are lowering our EPS estimates for FY20/FY21E to factor in the impact of coronavirus on the JLR business and weaker-than-expected recovery in the India CV business. As a result, our FY21E EPS has been cut by ~35% and FY20 has swung from profit to loss. For FY22, we have upgraded our EPS estimate by ~8% due to spillover benefit in the JLR business. For JLR, we are now factoring in volume growth of -3%/5.6%/7% for FY20/FY21/FY22E (v/s earlier estimate of 0.6%/4.6%/4.1%).
This translates to Ebit margins of 1.9%/3.4%/4.4% for FY20/FY21/FY22E (v/s earlier estimate of 2.8%/4.1%/4.3%). TTMT’s stock price has corrected by a sharp ~43% since the Coronavirus outbreak due to JLR’s high exposure to the China market and further spreading of the virus to other regions. The outbreak of coronavirus has halted JLR’s smart recovery in China (~25% growth since July 2019 till third week of January 2020). Considering its revamped strategy as well as favourable product pipeline, we do expect volumes to normalise for JLR in China from 2QFY21. Normalisation of operating environment in China and other markets is a key monitorable.
Our positive view on TTMT is based on (a) JLR’s improving product/market mix along with cost cutting initiatives, and (b) bottoming out of the India business. The stock trades at 16.3x/7x FY21E/FY22E consolidated EPS. We lower our target EV/Ebitda multiple for JLR to 2.25x (from 2.5x) to factor in the risk of delayed recovery from the coronavirus impact. Maintain ‘buy’ with a target price of Rs 178 (December 2021 SOTP-based).
