‘Neutral’ on Tata Motors: Healthy growth for JLR’s US sales in February

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Published: March 5, 2019 2:25:12 AM

Retail sales up 29% y-o-y in country; while stock is trading at lower end of its range, rerating is unlikely; ‘Neutral’ maintained.

Hard Brexit: If the UK has to leave the EU without any trade deal, this could lead to tariffs coming into place and affect JLR significantly in the near term.

JLR’s February 2019 US retail volumes showed healthy momentum reporting strong 29% y-o-y growth, ahead of our estimate of 18% y-o-y. This was across both Jaguar (up 59% y-o-y) and Land Rover (LR; 19% y-o-y).Model-wise, in LR, only RR and Velar reported

7-8% y-o-y decline while remaining models posted strong growth. In Jaguar, all models (except the XJ) reported strong growth on a favourable base.
Among luxury peers, growth trajectory has remained slow over past few months. BMW was flat y-o-y, while Audi/Mercedes declined 12% y-o-y. The overall industry reported 3% y-o-y decline. Incentives increased sharply m-o-m for JLR (Jaguar 26%, LR 11%). Incentives were down 1-3% for

Mercedes/Audi and Porsche but up 10% m-o-m for BMW.

We are factoring in a 12% decline in global wholesales for JLR in Feb-19 due to weak demand in China and the EU. We currently factor in a 10% decline in overall JLR volumes in FY19F (YTD -11%, implied Feb-Mar 19F down 8% or 61k pm). Ramp-up for I-Pace, launch of new Evoque can help volumes in FY20F.

The stock is trading at 4.2x/3.6x FY20F/21F EV/Ebitda, at the lower end of its trading band. However, we do not expect a re-rating given tough market conditions in China, risks to demand from a no-deal Brexit, weak premium demand in other markets and negative FCF for JLR until FY21F. Maintain Neutral.

Valuation methodology

We value TTMT on a SOTP methodology to arrive at our TP of `187. We value JLR at `66/share, based on 1.5x FY21F normalised Ebitda. We deduct the value of the unfunded pension liability of £248 mn to arrive at JLR’s valuation. We attribute `80/share value to standalone business, based on 8x FY21F Ebitda. We value other investments at `42/share.

Key risks
Hard Brexit: If the UK has to leave the EU without any trade deal, this could lead to tariffs coming into place and affect JLR significantly in the near term.

Global growth slowdown: Weaker-than-expected economic growth in developed economies could present downside risks to earnings estimates.
Adverse currency movements: JLR is a net exporter in USD and net importer in EUR; thus, USD appreciation and EUR depreciation vs GBP are positive for JLR’s profitability. Any adverse currency movements could impact margin estimates.

 

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