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Tata Motors' Q1FY19 results (Neutral) - JLR disappoints again

Q1FY19 results highlights

• Adjusted PAT below expectations: Tata Motors adjusted consolidated 1QFY19 loss at Rs 10.5 bn was below our profit estimate of Rs 5.2bn.On an operating basis, the consolidated EBITDA at Rs 54.3bn (+9% yoy) was 22% below estimates. The sharp variance was due to  weak performance by JLR business that more than offset the strong, higher than expected performance of the standalone business (PAT at Rs 11.9bn; EBITDA margin at 9.3%).
• Jaguar Land Rover: JLR’s Revenues at GBP 5.2b (-7% yoy) was on account of 7.7% decline in wholesale volumes (weakness in key markets was accentuated by inventory de-stocking). Reported EBITDA margins at 6.2%(-730 bps qoq, -170 bps yoy) were weak. Even adjusting for the China duty change impact, the margins at 7.8% were disappointing. Consequently, EBITDA at GBP 325mn (-26% yoy) was well below our estimates. On an EBIT level, JLR reported a loss of GBP 194mn (est: +30mn, margins: -3.7%). The disappointing performance reflected negative operating leverage (apart from weakness across markets volumes had been also been impacted by de-stocking) and higher incentives. Additionally, China JV profit declined 61% yoy to GBP 30mn (EBITDA margins slipped from 31% in Q1FY18 to 21%) on account of higher variable marketing expenses.
• Turnaround in domestic business continues: Revenues grew by 82% yoy to Rs165 bn on strong volume growth (+63% yoy). EBITDA margins surprised at 9.3% largely on account of an improvement in the PV business (EBITDA margins improved from –19.7% to -0.7%).
• Key points from the concall: (a) Management expects pressure from destocking to continue to weigh on wholesale volumes over the next quarter as well (b) FCF was negative at GBP1.7bn as working capital negative due to seasonality and lower wholesale volumes. (c) Variable marketing expenses were higher 8% of sales (v/s 6% in 4QFY18) partially due to duty changes in China (d) It maintained its EBIT margin guidance of 4-7% from FY19-21. (e) Pressure points in USA (high incentives), Europe (anti diesel sentiment) and UK continue.

Key positives: Recovery in standalone business

Key negatives: Weak wholesale volumes and lower China JV margins

Impact on financials: Cut FY19/FY20 EPS by ~8% each. Weaker China margins/higher incentives in JLR offset higher domestic profitability

Valuation & view

The current quarter brings to the fore the concerns with JLR. The car market in USA/UK/Europe remains challenging with rising competitive intensity, global concerns (Brexit/ Tariffs) and an anti-diesel sentiment. 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 40% in the past year, we believe the risks persist. Maintain Neutral with a target price of Rs279.