TTMT's chairman recently alluded to a target to clear off the net debt in three years. We believe over FY22/23 TTMT can generate more than GBP3 billion of FCF.
By HSBC Global Research
A leaner and focused JLR and recovery in M&HCV industry in India could create significant value for TTMT shareholders. We expect reasonable reduction in net debt over FY22 and FY23, led by c.GBP1billion/year free cash flow from JLR. A favourable scenario for divestments could add another GBP1billion. Upgrade to ‘buy’ with target price of Rs 200 (from Rs 120).
The past few years have been a perfect storm for TTMT as both JLR and the domestic business struggled. JLR’s problems were more company- specific, while domestic MH&CV was impacted by the worst downturn ever. Unsurprisingly, the stock has been highly volatile and risky and, despite doubling from the low of April, is still more than 70% down from the peak in September 2016. We believe the risk-reward is favourable for equity investors now. It’s unlikely that JLR volumes or profitability will see the kind of highs seen in FY14-16, but even a leaner and more focused business can create value for investors. We think the domestic M&HCV business should recover and the domestic CV cycle should bottom out in the coming months.
TTMT’s chairman recently alluded to a target to clear off the net debt in three years. We believe over FY22/23 TTMT can generate more than GBP3 billion of FCF.
Along with that, divestments of some of the subsidiaries should help as well. This would mean by the end of FY23, TTMT should have a net automotive debt of GBPc3-4 billion (vs c.GBP7 billion at end of 1Q21 and c.GBP6 billion as of FY21e) and even at the current EV of c. GBP12.5 billion, equity value would be up 60% (GBP8.5 billion).
We expect global luxury PV volumes to grow more than 10% y/y in 2021e. While volume growth will remain unpredictable and every market participant will play it by ear, margin performance will be the key in the near term. In our view, 5-6% ebit margins are achievable in FY22/23e and that should mean c.GBP1 billion FCF in both the years. We expect a leaner product portfolio from JLR in the coming years (especially Jaguar). In our view, electrification of Jaguar’s portfolio is inevitable. This will serve a dual purpose for JLR to gain traction in EVs and also lean down on the ICE product portfolio.
We expect decent volume recovery for the M&HCV industry in FY22/23. Still, FY23e volumes will be c30% lower than FY19 volumes. Importantly, domestic PVs remain the upside risk to domestic earnings and valuations. The last few months’ performance has been encouraging and a sustainable 25K/month volumes in FY22 could add significant value to the stock.
On consolidated FY23e EPS of Rs 34, the implied PE on our TP is 6x. In EV/ebitda terms, on FY23e ebitda, JLR’s valuation is 2.5x. GBP appreciation is the key risk to our forecasts.