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Tata Motors' Q2FY19 results (Neutral) - Pressure points persist

Q2FY19 results highlights

• Reported PAT below expectations: Tata Motors reported consolidated 2QFY19 PAT at Rs-186 mn was sharply below the strret estimates of 10bn. The variance was largely on one off items, excluding which consolidated EBITDA at Rs 67.6bn (-22% yoy) was inline with low expectations.
• Jaguar Land Rover: JLR’s Revenues at GBP 5.6b (-11% yoy) was on account of ~6% decline in wholesale volumes and a ~5% qoq  drop in realization. Lower realisations reflect the slowdown in the high margin/high value Chinese market. EBITDA margins adjusted for one off warranty costs came in margins at 9.1%% (+290 bps qoq, -270 bps yoy) broadly inline with estimates. However, on an EBIT level, JLR reported a loss of GBP 38mn (est: +48mn) partially on the weak results of the China JV (PAT share was at USD3mn versus 30mn in Q1).
• Turnaround in domestic business continues: Revenues grew by 29% yoy to Rs177.6 bn on robust volume growth (+24% yoy). However, EBITDA margins disappointed a bit at 8.5% largely on account of higher other expenses. On the positive side, the PV business reported break even (EBITDA margins improved from –13.8% to 0.2%).
• Key points from the concall: (a) Management has guided for flat volumes for FY19 and EBIT breakeven due to weak China sales. It expects positive cash flows in 2HFY19 through inventory reduction.(b) EBITDA margins for 3QFY19 are likely to be under pressure on start-up costs of Slovakia plant along with production down time.(c) JLR China inventory stood at 1.5 months, which the company plans to bring it down to 1 month of China sales. (d) The management expects to reduce costs by GBP1bn over FY19-20 and has announced a cut in capex by GBP500mn for each of the next two years

Key positives: Recovery in standalone business

Key negatives: Weak wholesale volumes and lower China JV margins

Impact on financials: Cut FY19/FY20 EBITDA by 18.3/11.7% respectively leading to sharp EPS cuts of 64/38%. Weaker China margins/higher incentives in JLR offset higher domestic profitability

Valuation & view

With strong headwinds (diesel sentiment, Brexit, trade wars) affecting sales/margins, JLR may now focus on cutting costs/capex to improve free cashflows/profitability. However, these measures which come at a time when global peers are increasing capex/expenditure to counter disruptive technological changes could impact JLR’s long term edge. While the stock has corrected nearly 60% in the past year, we believe the risks persist. Maintain Neutral with a target price of Rs190.