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Management Speak: Tata Motors (Neutral) - Analyst meet takeaways: challenges persist

We attended the analyst meet of Jaguar Land Rover in UK. On the whole, the company recognized the challenges ahead of it (anti-diesel sentiment, high incentives, electrification, ACES) but also hoped to counter the concerns. We do note that the roadmap to a turnaround in JLR seemed hazier than the strategy that the company had for the domestic business. Key takeaways from the meet are as follows:

Challenges persist: The management highlighted various challenges for the company in key markets – USA (higher incentives), UK (Brexit and dieselization) and Europe (dieselization). In addition, structural changes – investment in ACES (Automated Connected Electric Shared) pose further challenges. The management hopes to counter the concerns through a combination of product strategies and cost cutting measures to achieve its target of 4-7% EBIT margins in the near term (till FY21; currently 3.8%) and 7-9% in the long term.

Manufacturing and cost- control strategy: The management indicated that the cost control measures included a control on capex – this will be restricted to GBP 4.5bn over the next 3 years and thereon the management expects it to become 12-13% of the revenues (currently ~18%). The management expects to meet its guidance of 4-7% EBIT margin till FY21 and 7-9% in the long term through (a) Operating leverage benefits (b) cost cutting measures specially through lower development costs and better sourcing (including a “should cost” analysis) (c) Reduction in the number of engine/ gear combinations (d) Reducing the number of platforms through the Modular Longitudinal Architecture (MLA) that increases throughput per platform (e) Benefit from the low cost Slovakia plant/ greater localisation at the China plant.

Product and platform strategy: Apart from the I-Pace and the replacement for the Defender (planned in FY21), the company has another 2 product introductions by 2024. Overall, it expects electric vehicles to form ~20% of its sales in the medium term – in that context the I-Pace is an important vehicle. It will introduce the (MLA) to be rolled out in phases till 2026 to reduce product development time/increase flexibility (vehicles will offered with a choice of PHEV/EV/Diesel/Petrol).

Valuation & view

The car market in USA/UK remains challenging with rising competitive intensity at a time when the company’s recent launches (Discovery) have not been successful. The shift towards electric vehicles in the next 1-2 years potentially has a greater negative impact on smaller players such as JLR. While the stock has corrected nearly 34% in the past year, we believe the risks persist. Maintain Neutral with a target price of Rs 310.