Tata Motors Q2FY19 earnings remained weak....

Tata Motors Q2FY19 earnings remained weak post a very challenging demand environment in most of JLR’s markets, and especially in China. TTMT posted a consol loss of Rs10bn in Q2 primarily due to sharp deceleration in profitability at JLR (EBIT -0.7%)

JLR performance

·         JLR’s EBIDTA margin declined 270bps YoY to 9.1% and its resultant EBIT was down 590bps YoY to -0.7% primarily due to challenging demand environment in most of its markets, impact from warranty actions (GBP39 mn) and start-up costs at Slovakia and Austria

·         Overall, JLR retail volumes in Q2 declined 13% yoy to 130k units (North America down 5% yoy, UK down 1%, Europe down 12% and China down 44% yoy)

·         China demand was hurt by a weak consumer demand impacted by frequent tariff changes led by trade war issues. Demand in Europe and UK continued to be hurt by lower diesel demand and changeover to WLTP in the quarter

·         Overall, JLR posted a loss of GBP 101mn in Q2.

·         Also, its FCF now stands at -624mn GBP for Q2 and -2.3bn GBP for 1HFY19

Standalone performance

·         The only silver lining in results was the improvement at the standalone entity with strong demand in CV segment and a gradual turnaround in PVs

·         The standalone entity posted 210bps improvement in EBIDTA margin to 8.7%, on the back of strong 29% volume growth in CVs. It also posted a break-even for the first time in the PV segment

·         On a segmental basis, while PV segment EBIDTA margins improved 1400bps to 0.2% (EBIT margin up 1690 bps yoy to -8.7%), CV segment margins declined 150bps yoy over a relatively high base to 11.4% (EBIT margin down 60bps yoy to 8.7%)

·         Q2 FCF for the standalone entity stood at Rs6.9bn

JLR Outlook

·         One key initiative (rather a forced one, in our view) is that the management is now targeting to save GBP2.5bn in cash and profits over the next 18 months through a combination of: 1) lowering capex by GBP 1bn over two years (so capex for FY19 and FY20 now stands reduced to GBP4bn each from GBP 4.5bn) 2) GBP500mn worth of savings from working capital reductions 3) GBP1bn of savings from cost cutting initiatives and demand improvement

·         Management now expects to achieve EBIT break-even for FY19 (from -2.1% EBIT for 1H) and maintain its guidance of 4-7% EBIT over FY3/20-21 and 7-9% over the long term

·         FCF is likely to remain negative in FY19 (although they target positive FCF in 2HFY19) despite the curtailed capex and working capital improvements

·         Overall debt at JLR stands at 5.1bn GBP

Standalone outlook

·         Its Turnaround 2.0 plan seems to be well on track with TTMT improving its market share in both PVs and CVs in 1H.

·         In PVs, its market share has improved to 6.2% for 1H compared to 5.7% in FY18. It is now ranked no 2 in the JD Power 2018 Customer Service Index. The soon to be launched Tata Harrier is likely to help further boost volumes and hence performance of the PV segment in coming quarters

·         In CVs, its market share has improved 90bps to 46% in 1H.

·         Overall, debt at standalone entity stands at 202bn

·         Management expects to be FCF positive (for standalone entity) for FY19

·         They maintain their EBIT margin guidance of 4-6% between FY19-21 and between 5-7% thereafter

JLR PBT movement YoY (GBP mn)

Standalone PBT movement YoY (INR mn)

EBITDA margin trend

Region-wise JLR volume growth Vs industry         Domestic Market share trend

PV EBITDA Margin Trend                                CV EBITDA Margin Trend

Source: Company