The India business sharply underperformed, with the Ebitda margin at 3.8% (Nomura: 1.8%), impacted by a 230 bps of write-off in the PV business.
JLR’s Q2FY20 EBITDA/EBIT margins at 13.8% were significantly higher than our estimates of 8.6%. A 200 bps q-o-q drop in variable marketing costs and a 200 bps drop in warranty costs helped. This was partly helped by a strong model mix, which may come off somewhat. However, with further potential for cost cutting, we expect margin improvement to be stronger.
We thus raise our JLR Ebitda margin estimates to 12.6%/14%/15% (from 10%/12.3%/12.8%) for FY20/21/22. With this, we expect JLR to turn FCF breakeven by FY22F. We continue to expect volume growth of 2%/7%/5%. Success of the new Defender may provide further upside to our estimates.
The India business sharply underperformed, with the Ebitda margin at 3.8% (Nomura: 1.8%), impacted by a 230 bps of write-off in the PV business. CV Ebit margin was at 3.8%. We believe that the current MHCV demand is below replacement levels and will rebound sharply as freight demand improves.
For the standalone business, we continue to factor in -35%/+5%/+25% MHCV growth in FY20/21/22. We factor in Ebitda margins at 2.9%/4.4%/6.8% over FY20-22F (4.3%/4.3%/6.8% previously).
Tata Sons announced a capital infusion worth Rs. 6,500 crore through preferential allotment of shares and warrants @ Rs. 150/share to reduce debt, which is a positive development (~12% dilution). Our target EV/Ebitda multiple is unchanged at 1.5x FY21F for JLR (Rs. 79/share) in line with global luxury OEMs and 8x for the standalone business (Rs. 38/share). We value investments at Rs. 36/share. Thus, we arrive at our TP of Rs. 153. We upgrade our rating to ‘neutral’ mainly driven by a higher value for JLR (from Rs. 40/share). A key risk is further margin pressure for JLR on account of any weakness in global PV demand.