Jaguar Land Rover (JLR) is improving chip supplies globally, along with a very strong order book, according to brokerage Motilal Oswal. This would be supplemented by a substantially favourable mix in favour of its three most profitable products (74% of order book), as well as a favourable mix and operating leverage benefit. In turn, improving supplies would further aid the release of working capital and enable substantial net debt reduction by FY25E (to <£1bn from £3.85bn in Dec-22).
A strong recovery in JLR, sustained resurgence of the India business, and a possible monetisation of its stake in Tata Technologies are the key catalysts for the stock over next 12 months. Maintain Buy with TP of `540 (Mar-25E based SOTP).
Since Q1FY22, JLR has been severely impacted by chip shortages, as reflected in <25k/month average wholesales as against >40k/month earlier. Chip supplies have been gradually improving over the last few months. This is reflected in Q3FY23 wholesales (ex JV), which were highest since chip supplies aggravated from Q2FY22, grew 15% y-o-y/6% q-o-q in Q3FY23.
Demand for PVs in general and JLR products, in particular, remain strong in key markets globally, though the macro environment is not supportive. JLR is witnessing the benefit of full upgrades of its most important and profitable products, viz Range Rover (RR), Range Rover Sport (RRS), and Defender, leading to a substantial increase in order book.
Order backlog for JLR in EU (incl. UK) and RoW markets has surged to 215k units (Dec-22). Given the supply-constrained environment, JLR has focused more on production than marketing, as reflected in a sharp reduction invariable marketing expenses (VME) to 0.6% in Q3FY23. As supplies improve, it has the lever of increasing VME to 2-2.5% to boost volumes, if required.
JLRs mix has been improving, driven by a strategic shift in demand-pull led sales, driving Land Rover
JLR’s financial performance has been severely impacted by chip shortages and its associated cost inflation, despite improvement in mix. This is reflected in just100bp improvement in gross/Ebit margins over FY21 level, as the benefit of mix was materially diluted by higher costs for chips, vendor compensation for lower volumes, and operating deleverage.
With visibility of supplies improving gradually, further improvement in mix and favourable Fx (foreign exchange), we expect a sharp improvement in financial performance in JLR at profitability, cash flow, and debt level. We estimate
JLRs FY24 wholesales (ex JV) growth of 27% y-o-y to 394k, and FY25 volume growth of 7% to 417k units. This translates to Ebit margins improving to 5.6%/5.8% in FY24E/ FY25E, respectively.
India CV business continues to see cyclical recovery and has a positive outlook, though there is emergence of red flags in the form of higher interest rates. The management has made a strategic shift by moving to demand-pull model with the objective of restoring its double-digit margins. It has started to reduce discount from Sep-22 and the benefit of which was already reflected in Q3FY23. This had led to an upgrade of 20% in our estimates for CV business profits, post Q3FY23 results.
Domestic PV business, which benefitted substantially from favourable product lifecycle, has been outperforming domestic PV market with 67%/63% y-o-y growth in FY22/ FY23YTD, respectively, resulting in market share gain to 14.2% in FY23YTD. With no major new launches lined up for TTMT and some of its key competitors benefitting from a favourable product lifecycle, we believe TTMT’s market share has peaked out for the next 12-15 months. It would be launching Curvv (mid-sized SUV expected in CY24), Harrier EV (CY24), Sierra EV (e-SUV in CY25), and Avinya (first born EV in CY25).