Analyst Corner: Retain ‘sell’ on Tata Motors; revised fair value at Rs 155

JLR retail volumes declined by 9% year-on-year (YoY) in 3QFY21, led by volume decline across regions, except China. 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 a weak model launch pipeline. We retain ‘sell’ but revise fair value to Rs 155 (from Rs 135 earlier), noting cost-cutting initiatives and roll-over to March 2023E (from December 2022E earlier).

JLR retail volumes declined by 9% YoY to 128,469 units in 3QFY21. Jaguar volumes declined by 21% YoY while Land Rover volumes declined by only 5% YoY led by the success of the newly launched Defender. China volumes grew by 19% YoY to 32,668 units driven by strong recovery in Chinese regions. UK volumes declined by 9% YoY in 3QFY21 due to concerns around Brexit and a second wave of Covid-19. Other markets continued to struggle with declines in volumes in Europe (-16% YoY), North America (-17% YoY) and rest of the world (-20% YoY) in 3QFY21.

In terms of models, new Range Rover Defender continued its uptrend (+66% QoQ) in 3QFY21. Jaguar I-Pace volumes increased by 69% YoY, led by strong traction for the electric variant YoY and volumes of XE increased by 31% YoY in 3QFY21. In 3QFY21, mix for all-electric stood at 6.1%, PHEV stood at 5.5% and MHEV stood at 41.4%. For CY2020, share of electric vehicles mix stood at 43.3%. We expect JLR volumes to grow by 2% CAGR over FY2020-23E led by recovery from FY2022E onwards. We expect Ebitda margin to improve to 12.8% in FY2023E from 8.7% in FY2020, led by operating leverage benefits and £6 billion of cost savings under project Charge and project Charge+. The company expects to save the remaining £0.7 billion during 2HFY21E by focus on lowering warranty costs, minimising overhead cost base and improve current portfolio returns by reducing material cost.

We also expect the company to generate FCF over the next two quarters, led by improvement in operating performance. However, we expect muted volume growth over the medium-term given weak global economy and weak model pipeline in the electric segment.

We expect Tata Motors’ standalone volumes to grow by 12% CAGR over FY2020-23E led by strong recovery in truck segment amid rising freight rates and improving fleet utilization levels and 15% volume CAGR in domestic PV segment. We reckon heavy truck demand segment to show a strong 18% CAGR over FY2020-25E led by replacement demand and recovery in freight demand. We expect road freight demand to grow by 3% CAGR over FY2020-25E led by an increase in government and private sector investments and increasing interstate movement of goods and passengers owing to strong growth in FMCG, retail and pharmaceutical industries.