JLR volume ramp-up in China to be a key driver of stock
Tata Motors (TTMT) reported Q4 JLR Ebitda of GBP1 bn with Ebitda margin at 17.4% (Nomura estimate:
GBP1.06m, 17.7%) and standalone margin at +1.5% (Nomura est: -1.5%). JLR results benefitted from a GBP55m forex gain on a quarter-on-quarter basis. However, other expenditure was very high at 14.5% of sales, vs an average of 13% over the past few years, mainly owing to XE/XF launch related expenses, and startup costs for new capacity and engine facilities, which are expected to come off as volumes ramp up.
For JLR, the key concern remains the volume ramp-up in China following the 20% drop in Q4 due run down of old models (Freelander and Evoque) and the management’s focus on ensuring that the product quality at the China JV is similar to the imported models. We believe that it is critical to get the quality right initially as inferior quality perception in early stages can have impact on longer-term pricing of the JV’s products.
To factor in a slower volume ramp-up, we reduce our JLR volume estimate by 3% to 551k for FY16F (forecast), but keep our FY17F estimate unchanged at 648k. This implies a strong 17% volume CAGR (compound annual growth rate) over FY15-17F, which is still the best amongst all luxury OEMs (original equipment manufacturers). We estimate JLR to report Ebitda margins of 17.2% in FY16F and 17.1% in FY17F (down from 17.3% and 17.5% previously) vs 18.9% in FY15F. Given that the stock has corrected by 11% in the past three months, the lower JLR volumes appear to be factored in the current price.
Q4FY15 results: TTMT’s reported consolidated Ebitda came in at R84.4 bn, 18-22% below our and consensus expectations. However, we note that under India’s GAAP unrealised MTM (mark-to-market) loss (R15 bn) on hedge book is accounted above the Ebitda line. Therefore, adjusted for this, Ebitda should be around R100 bn.
JLR business: Ebitda came in at GBP1.01 bn.ASP (average selling price) was 3% below our estimate, on possibly weaker China mix. Ebitda margin was at 17.4%.
Standalone business: Ebitda came in at R1.6 bn. Key surprise was gross margin expansion of 6% q-o-q vs our estimate of 200 bps. However, adjusted profit after tax loss of R10.6 bn was worse than our estimate for a loss of Rs 8.5 bn due to higher depreciation and interest expenses.
Global luxury car demand still strong: Global luxury car demand has remained strong over the past six months, with under 9% volume growth. Growth in developed markets like the US and Europe has improved over the past few months, while growth in China has been soft over the past two-three months.
JLR—adjusting FY16-17F estimates: We have cut our FY16F volume estimate by 3% assuming lower Jaguar XE volumes due to slower-than-expected production ramp-up. We now build in Jaguar XE volumes of 30,000 units in FY16F as compared to our earlier estimate of 50,000 units. Our FY17F volume estimate remains unchanged. We expect the company to deliver a 17% volume CAGR over the next two years.
We expect China volumes to pick-up over the next few months with ramp-up in Evoque production volumes as well as commencement of production of the Discover Sport and Jaguar XF models in H2FY16. We tweak our Ebitda margin estimates and now expect 17.2% margin in FY16F. Overall, we cut our FY16F/FY17F Ebitda estimates by 4%/3%.
Standalone business: We expect recovery in MHCV (medium and heavy commercial vehicle) volumes to sustain over the next two years and expect 25% volume growth in this segment in FY16F and 20% in FY17F. Our FY16-17F Ebitda estimates remain largely unchanged. Our PAT estimates have gone up due to lower interest expenses as the company will reduce debt from rights issue proceeds completed in early May. Overall, for the consolidated entity, we have cut our EPS forecasts by 8% for FY16F and 4% for FY17F.
Maintain Buy; Target price revised to Rs 623
We continue to value TTMT on a sum-of-the-parts (SOTP) methodology to arrive at our target price (TP) of Rs 623.
We value JLR at Rs 543/share, based on 4x FY17F normalised Ebitda of Rs 357 bn. In this, we explicitly value JLR’s stake in the China JV at Rs 103/share. We have cut our TP by 4% (from Rs 652) largely due to the cut in our JLR Ebitda estimates.
Key risks—weaker-than-expected growth in China: We expect a 30% volume CAGR in China over FY15-17F, led largely by local production and a strong new product pipeline. Further, given our view that China is the most profitable market for JLR, any disappointment from China due to regulatory concerns, demand slowdown, etc, could lead to downside risks to our earnings estimates. If economic growth in developed economies is weaker than our expectations, there may be downside risks to our earnings estimates. JLR is a net exporter in USD and net importer in EUR; therefore USD appreciation and EUR depreciation vs the GBP are positive for JLR’s profitability. Any adverse currency movements can lead to downside to our margin estimates.