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Tata Motors' Q1FY20 results (Neutral) - Weak results; clouded outlook

Q1FY20 results highlights

• Operating performance disappoints: Tata Motors reported consolidated EBITDA of Rs28.6bn was ~28% below expectations. The variance was largely due to JLR’s weaker than expected EBITDA margin. The company reported a consolidated loss of Rs 34bn (-47% yoy; expectation 17bn).
• Jaguar Land Rover: JLR’s revenues at GBP 5bn (-3% yoy) reflected a ~4% yoy decline in wholesale volumes (excluding the China JV). Notably, the realisations improved ~3% qoq on favourable currency movements. EBITDA margins for JLR decreased to 4.2% (-550bps qoq, -200bps yoy) with an EBIT  loss of GBP 278mn (margin -5.5%). The sequential EBITDA decrease largely reflects adverse operating leverage (volume declined by 31% qoq), higher variable marketing expenses and higher warranty costs. We note that the decline in EBIT and EBITDA margins is despite meaningful benefits from the reduction in headcount (GBP 60mn), favourable foreign exchange movements and lower depreciation costs. The China JV continued to report a loss even as the company attempts to turn around the JV and the China business.
• Key points from the concall for JLR: (a) FY21 guidance: The management stated that EBIT margins will be on the lower side of the guidance (3-4%).  We believe that the currency guidance assumes business as usual i.e without taking into account a no-deal Brexit. (b) Warranty expenses increased GBP314mn (up GBP 125mn yoy) during the quarter to ~6% of revenues. While warranty expenses could come down going forward, it will likely remain above historical average of ~4%. (c) Cost cutting measures on track: The management indicated that cost cutting measures remained on track – we estimate an additional 200-250bps incremental benefit from cost cutting measures during the year.  (d) China stabilising on a low base: CN5 stock clearance resulted in higher retail sales and lower inventory during the quarter. (e)JLR had a negative cashflow of GBP719mn – this was however meaningfully yoy improvement (Q1FY19 cashflows were a negative 954mn) as the company reduced capex and exercised control over the working capital.  

Key positives: Improved realisation for JLR

Key negatives: Sharper than expected decline in EBITDA

Impact on financials: We cut our EBITDA estimates for FY20/21 by ~9% each respectively on lower margins/volumes at JLR

Valuation & view

With strong headwinds (diesel sentiment, Brexit, trade wars) affecting sales/margins, JLR is now focussing on cutting costs/capex to improve free cashflows/profitability. However, these measures come at a time when global peers are increasing capex/expenditure to counter disruptive technological changes could impact JLR’s long term edge. Further, the increased likelihood of no-deal Brexit adds to concerns. Maintain Neutral with a target price of Rs131.