Report
Deepak Jain

Tata Motors' Q4FY18 results (Neutral) - Accounting policy change to impact profitability

Q4FY18 results highlights

  • Adjusted PAT below expectations: Tata Motors adjusted Consolidated 4QFY18 PAT at Rs 34.4bn (down 20% yoy) was below estimates of Rs 40.4bn. On an operating basis, the consolidated EBITDA at Rs 113.6bn (+5.3% yoy) was 7% below estimates. The variance was due to slightly weaker domestic business margins, lower than estimated JLR revenues and higher depreciation expenses.
  • Jaguar Land Rover: JLR’s EBITDA (adjusted for one-offs) at GBP 1.02bn (-2.2% yoy) was a bit below our estimates as realisations declined 1.3% qoq (likely on product mix). Adjusted EBITDA margins came in at 13.5% (-100 bps yoy, +250 bps qoq) - the sequential EBITDA margin expansion was on account of operating leverage. Higher than estimated depreciation costs offset stronger income from China (partially due to an accounting policy change). Consequently, adjusted EBIT margins at 6.7% were 50 bps below expectations.
  • Change in accounting policy to impact earnings: The management indicated that it would alter its accounting policy from FY19 to decrease the ratio of R&D spends that are capitalised (refer table inside). This would impact JLR’s EBIT margins by 100 bps and the domestic business margins by 70bps. In addition, the company has impaired its investments leading to an exceptional charge of Rs21bn.
  • Key points from the concall: (a) The company notes that barring China global headwinds continue across key geographies – UK (Brexit), USA (decline post cyclical peak) and Europe (diesel issues).(b)It looks to achieve EBIT margins of 4%-7% for FY19-21 for JLR while longer term it would target 8-10% (c)The company will incur a capex of GBP 4.5bn in FY19. (d) The cut in tariffs by China could benefit the company as imported vehicles (~10% of JLRs sales are vehicles exported into China)

Key positives: Improvement in China profitability

Key negatives: Change in capitalisation policy; weak standalone margins

Impact on financials: We cut our FY19 and FY20 EPS est by 15%/14% on (a) lower JLR volumes (b) limited currency benefits for JLR and (c) margin cuts to the standalone and JLR on a change in accounting policies

Valuation & view

The concerns with JLR persist. 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 Rs340.

Underlying
Tata Motors Limited Class A

Provider
IDFC Securities
IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions,  both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement  amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

Analysts
Deepak Jain

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