Tata Motors - Cost improvements reassuring - ICICI Securities

Tata Motors' (TTMT) Q1FY21 operational performance was better than consensus estimates as JLR posted positive EBITDA margin of 3.5% (down only 70bps) even as revenue dropped 44% YoY. The margin resilience is a reflection of continued success of aggressive cost reduction programmes (e.g. Project Charge+: FY21 cash savings target raised by GBP1bn to GBP2.5bn). The confidence on better capital allocation and cash management has led to improved guidance: a) India business to turn FCF positive in FY21 and b) JLR to be FCF positive in FY22. The core business in India remains in a difficult spot in CV segment while few green shoots are visible on market share gains in PVs. JLR's growth in FY22 may be driven by supportive market conditions in China, North America, coupled with new model launches (PHEVs/BEVs). Maintain BUY.

- Key highlights of the quarter: Standalone revenue declined ~80% YoY to ~Rs2.7bn while JLR revenue declined 44% to ~GBP2.8bn. JLR's EBITDA margin dropped only 70bps to 3.5% driven by cost reductions (warranty costs reduced 210bps). Project Charge+ delivered strong recurrent cash savings of GBP1.2bn in Q1FY21 driven by GBP 0.5bn of cost reduction. JLR reported FCF of GBP -1.5bn (lower than expected of GBP -2bn) largely due to temporary working capital outflow of ~GBP1.1bn. China JLR JV also turned marginally PAT positive as revenues rose 31% YoY to GBP 479mn and EBITDA margins rose to 9.8% (up 11.2% YoY).

- Key takeaways from concall: Management indicated : a) JLR delivered historical high ASPs (~GBP58.5k) due to superior product (higher sales of SUV5) and region mix (higher share of China and North America); b) strong response to New Defender 110 (>30k bookings) is expected to aid volumes in H2FY21; c) FY22 would witness new model offerings with electrified options and this could drag margins if mix share rose significantly; d) positive tailwinds expected in FY22 as most profitable RR/RR Sport would undergo a major refresh and e) capex for JLR trimmed to GBP2.5bn while for India business it has been cut to Rs15bn for FY21.

- Maintain BUY: We believe consensus is discounting a relatively low success rate for JLR to remain self-sustaining. The enhanced management focus on continued delivery of cost savings coupled with prudent capital allocation are likely to rebuild investor confidence in JLR. India business is at a cyclical low in terms of underlying business, the same is likely to improve in FY22. We maintain our target JLR multiple to 2.5x, maintain our BUY rating on the stock with a revised SoTP-based target price of Rs131 (earlier: Rs126).

Shares of TATA MOTORS LTD. was last trading in BSE at Rs.113.05 as compared to the previous close of Rs. 104.7. The total number of shares traded during the day was 15667312 in over 78394 trades.

The stock hit an intraday high of Rs. 114.4 and intraday low of 103. The net turnover during the day was Rs. 1740978959.

Source : Equity Bulls

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