Risk to estimates if weak demand persists in major markets; stock trading at lowest end of historical band; ‘Buy’ retained
JLR’s August 2018 US retail volumes increased ~2% y-o-y to 9.6k units, better than our estimate of ~10% decline. While Land Rover (LR) was up 14% y-o-y , Jaguar declined by 20% y-o-y. In LR, Discovery (6%), RR (9%), RR Sport (30%) and Velar reported growth while Evoque and Discovery Sport declined ~31/35% y-o-y. In Jaguar, E-Pace volumes ramped up to ~647units from ~340 over past 2 months. All other models declined y-o-y.
Amongst other luxury peers as well, growth trajectory has remained slow over the past few months. BMW was up 1% y-o-y while Audi reported 6% growth. Mercedes continued to decline sharply by 17% y-o-y. Overall industry growth was flat y-o-y. Incentives declined largely across all players– JLR was flat m-m, BMW/Porsche/Audi were down 4-7% m-m. Only Mercedes’ incentives jumped 11% y-o-y.
For Aug-18, we expect growth to remain weak for JLR with wholesales down 10% and retails down 7% y-o-y. We currently factor in 4% growth in overall JLR volumes in FY19F (YTD -12%, implied 8MFY19F up 11% or ~61k pm), driven by stronger demand post tariff cuts in China, healthy order book for I-Pace and ramp-up of XE (Long Wheel Base) in China. However, if weak demand continues across some major markets, there can be downside risk to our estimates.
The stock is trading at 3.5x/2.9x FY19/20F EV/Ebitda, which is at the lowest end of the historical trading band even with Ebit margin assumptions much more conservative than guidance. The major potential stock catalysts are: (i) visibility on improving volume growth at JLR; (ii) margins starting to trend along the guidance path of 4-7% Ebit margins that management has reiterated; and (iii) better-than-expected growth in domestic MHCVs. We maintain Buy with
SOTP-based target price of Rs 356.
(i) Delayed/slow ramp-up of new launches: Prolonged ramp-up of new launches may pose a risk to our annual volume estimates for the next two years; (ii) Slowdown: weaker-than-expected economic growth in developed economies could present downside risks; (iii) adverse currency movements: JLR is a net exporter in USD and net importer in EUR; thus, any adverse currency movements could lead to downside to our margin estimates.