Tata Motors - Focus on deleveraging and profitability - ICICI Securities

Tata Motors' (TTMT) Q2FY21 operational performance was better-than-consensus estimates as consolidated EBITDA margins came in at 10.5% (down ~160bps YoY) even as revenue dropped 16% YoY. Strong net debt reduction aspiration led by FCF (Q2FCF:~Rs67bn) generation is top priority (ahead of capex) for the management. We believe improving capex efficiency across businesses would be critical; access to incremental capital should be contingent on the business segments right to win. For India business, non-core asset sale, potential investment from new partner in domestic PV business will also be strong levers to deleverage. The core CV business in India is at trough demand while green shoots are visible coupled with market share gains in PVs. JLR's performance in FY22 is likely to driven by new products (Defender) coupled with continued cost reduction success. Disorderly Brexit remains a key risk. Maintain BUY.

- Key highlights of the quarter: Standalone revenue declined ~3% YoY to ~Rs97bn while JLR revenue declined ~29% to ~GBP4.3bn. JLR's EBITDA margin dropped 240bps to 11.1% driven by structural cost reductions. Project Charge+ delivered recurrent cash savings of GBP0.6bn in Q2FY21. JLR reported FCF of GBP463mn driven by tight working capital control. India PV/CV business both clocked positive EBITDA margins at 1.6%/3.2% respectively.

- Key takeaways from concall: Management indicated: a) JLR breakeven reduced to 400k units (from 575k units in FY19) due to superior product (higher sales of SUV5) mix coupled with strong cost reduction initiatives; b) strong response to New Defender 110 as orderbook for FY21 remains ahead of production capacity and launch of Defender 90 in Q3 is expected to aid volumes in H2FY21. Management expects retail sales to remain strong (>5k unit/month); c) currently, PHEV/BEV contributed 7-8% in EU (includes UK) and is expected to reach 11-15% contribution in CY21; the company has till date made provisions of EUR90mn w.r.t possible penalties for emission non-compliance in EU/UK region; and d) TTMT plans for Rs60bn of cash savings for India business of which ~Rs25bn has been achieved.

- Maintain BUY: We believe consensus is discounting a relatively low success rate for JLR to remain self-sustaining, achieve meaningful deleveraging. The enhanced management focus on FCF generation coupled with improving domestic business positioning in PV business are likely to rebuild investor confidence. We rollover to Sep'22E and prune our target JLR multiple to 2.2x (earlier: 2.5x), maintain our BUY rating on the stock with a revised SoTP-based target price of Rs197 (earlier: Rs131).

Shares of TATA MOTORS LTD. was last trading in BSE at Rs.135.7 as compared to the previous close of Rs. 133.65. The total number of shares traded during the day was 2354638 in over 12645 trades.

The stock hit an intraday high of Rs. 136.8 and intraday low of 131. The net turnover during the day was Rs. 316416688.

Source : Equity Bulls

Keywords