Analyst Corner: Retain ‘sell’ on Tata Motors, revise fair value to Rs 120

The company reported consolidated Ebitda of Rs 56.7 billion (-21% y-o-y) in 2QFY21, significantly above our estimates due to Ebitda outperformance in the JLR business. Even as the management has done a good job in cutting costs and conserving cash, volume outlook for JLR remains weak due to weak global growth and model launch pipeline besides the Brexit event in CY2021. We retain ‘sell’ but revise Fair Value to Rs 120 (from Rs 90 earlier), noting cost-cutting initiatives.

JLR reported Ebitda of GBP481 million (-41% y-o-y) in 2QFY21, which was 31% above our estimate of GBP366 million, primarily due to higher net realisations because of a richer geographical mix (higher mix from China) and lower variable marketing expense (3.8% in 2QFY21 versus 5.9% in 2QFY20), better-than-expected gross margins and lower employee costs.

Reported Ebitda margin was 11.1% in 2QFY21 (down 230 bps y-o-y and up 760 bps q-o-q) as compared to our estimate of 9.2%. ASPs increased by 18% y-o-y due to a favorable geographical mix (higher contribution from China) and favorable model mix (higher Land Rover mix).

China wholesale volumes (excluding China JV) increased by 26% y-o-y in 2QFY21.

North America and EU volumes declined by 44% y-o-y in 2QFY21 while UK volumes declined by 37% y-o-y and rest of the world volumes were down by 62% y-o-y in 2QFY21.

The standalone business reported an Ebitda of Rs 1 billion (KIE: Ebitda of Rs 1.1 billion) in 2QFY21 versus loss of Rs 3.8 billion in 2QFY20 led by recovery in PV volumes (+108% y-o-y), Rs 4 billion savings due to cut down in fixed manufacturing expense and Rs 1.1 billion positive impact on account of forex gains, partly offset by 8% y-o-y decline in standalone ASPs due to an inferior product mix (lower mix of M&HCVs).

We have increased our FY2021-23E consolidated EBITDA estimates largely to factor in aggressive cost cuts in standalone and JLR businesses and higher volume assumptions in the standalone business led by strong recovery in the domestic PV business. Our SoTP-based Fair Value has been revised to Rs120 (From Rs90 earlier) factoring in higher margin assumptions in standalone and JLR businesses. We maintain our SELL rating on the stock as we have a muted outlook for recovery in JLR volumes considering the weak global economy, a weak model launch pipeline and the Brexit event in CY2021E, which could have a material impact on the JLR business.