Wednesday, August 1, 2018

Concall highlights of TATA Motors

Key concall highlights
·         Slowdown in China was limited to 1Q as some demand was deferred given that the government announced reduction in import duty on cars wef July2018. Hence, management expects demand to normalise in the coming months in China.
·         However, incentives have increased in China in the last few quarters. Variable marketing expenses have increased by 200bps yoy to 8% of revenues
·         On account of a subdued demand in key markets, JLR had to reduce production and thereby reduce stocks at dealerships. Some inventory destocking is expected to continue even in 2Q
·         JLR witnessed a cash outflow from working capital worth GBP960mn primarily due to inventory destocking
·         China JV PAT was sharply lower due to unfavourable mix (launch of long wheel base JagXE), higher marketing spends and higher depreciation and amortisation
·         I-Pace has received a very good response and enjoys a order book of 5.5 months
·         As per management, they would continue to target to achieve 4-7% EBIT margin in the near term primarily on the back of operating leverage benefits from new model launches and led by their focussed cost cutting measures
·         New axle load norms have created some confusion in the market and may hurt demand in the near term. However, demand continues to be strong and should normalise in subsequent quarters
·         As part of its Fit for Future strategy, management has decided to cease Thailand operations as they were not generating good returns (FY18 loss stood at Rs1.7bn)

Tata Motors posted a consolidated loss in 1Q at Rs19bn Vs our estimate of a PAT of Rs2.6bn on account of higher than expected margin pressure at JLR even as standalone margins showed commendable improvement

JLR performance
·         JLR margins declined by 170bps YoY to 6.2% due to: 1) sales deferral in China (impact of GBP110mn led by higher marketing spends and lower wholesales) 2) higher destocking due to subdued demand environment in its key markets (impact of GBP110mn) 3) WLTP impact (impact of GBP30mn) 4) Forex loss of GBP116mn on account of forex revaluation
·         Increased depreciation and amortisation (up GBP 99mn) led to further impact of EBIT margin (down 490bps YoY)
·         Its key markets continued to face subdued demand with retail sales up just 6% yoy at 146k units (UK up 14% yoy, US up 9% yoy and China up 2.5% yoy). Demand in China remained subdued due to sales deferral on account of reduced import duty on luxury cars wef July 2018
·         On account of subdued demand in China, China JV EBIDTA margins dipped sharply to 21% (from 35% yoy) and PAT at GBP60mn (Vs PAT GBP154mn yoy)
·         While some of the above factors could be considered one-off, it is important to highlight that management has not implemented its revised PDP policy in 1Q (as its based on completion of projects and hence is a timing issue) which would hurt EBIT margins in subsequent quarters
·         JLR has posted a FCF loss of GBP1.7bn post a capex of GBP 1.1bn in 1Q

Standalone performance
·         Standalone entity revenue grew 83% yoy to Rs16.8bn on the back of strong 63% volume growth in CVs and 49% growth in PVs
·         On account of strong volume growth, improved mix and its cost cutting initiatives, EBIDTA margins improved 890bps yoy to 8.3% while EBIT margins improved 1220bps to 4.1%
·         On a segmental basis, CV EBIT margins improved 740bps yoy over a low base to 8.8% (EBIDTA margin remained flat qoq at 11.7%). Also, PV EBIT margins improved by 25% yoy to -8.6% (from –33.9% YoY). PV EBIDTA margins improved to -0.7% in 1Q from -9.7% qoq – this was the major reason for the sharp margin improvement at the standalone entity.
·         Substantial improvement in standalone margins came from operating leverage benefits (impact of 11% on margins)
·         At the standalone level, it has posted FCF loss of Rs24.9bn post its capex of Rs9.6bn for 1Q

We have a Neutral rating on the stock.

JLR PBT movement YoY (GBP mn)
   Source: Company data

Standalone PBT movement YoY (INR mn)
   Source: Company data

Region-wise JLR volume growth Vs industry

Domestic Market share trend

   Source: Company data

   Source: Company data

PV EBITDA Margin Trend
Source: Company data

CV EBITDA Margin Trend
Source: Company data

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