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Tata Motors' Q2FY20 results (Upgrade to Outperformer) - JLR springs a massivesurprise; risk return favorable

Q2FY20 results highlights

• Operating performance well ahead: Tata Motors reported consolidated EBITDA of Rs70.5bn was ~34% above expectations. The variance was largely due to JLR’s stronger than expected EBITDA margin. The company reported a consolidated loss of Rs 2.1bn (expectation: loss of Rs 7.7bn).
• Jaguar Land Rover: JLR’s revenues at GBP 6.1bn (8% yoy) reflected a ~3% yoy increase in wholesale volumes (excluding the China JV). Notably, the realisations improved ~4% qoq on favourable currency movements/product mix. EBITDA margins for JLR increased to 13.8% (+960bps qoq, 480bps yoy) with an EBIT of GBP 295mn (margin 4.8%). The sequential EBITDA increase reflects a confluence of factors including operating leverage (volume rose by 16% qoq), lower variable marketing expenses (-200bps qoq), lower warranty costs (-200bps qoq), favourable currency movements (+170bps qoq) and cost cutting measures.
• Key points from the concall for JLR: (a) FY20/21 guidance: The management reiterated that EBIT margins will be in the 3-4%.  (c) Cost cutting measures on track: The management indicated that cost cutting measures remained on track to saving GBP2.5bn over the course of the year (current achievement GBP2.2bn) (d) China- key KPI’s improving: Retail stock is at its lowest since 2017, return on sales for retailers has been improving and local registration rates have improved. (e)JLR’s cashflow showed an improvement –The cashflows at JLR were marginally negative at GBP64mn – this was however a meaningful yoy improvement (Q2FY19 cashflows were a negative 623mn) as the company reduced capex and improved operating profitability.  

Key positives: Improved realisation; higher margins for JLR

Key negatives: Weakness in the China JV; weak standalone EBITDA

Impact on financials: We increase our EBITDA estimates for FY20/21 by ~7%/9% respectively on higher margins at JLR.

Valuation & view

In the recent past, some of the potential headwinds impacting JLR seem to be receding – the probability of no-deal Brexit is declining whilst there has been positive movement on the US-China trade war. In addition, the company seems to be implementing its cost cutting measures rigorously. The current quarter results clearly adds to the momentum and management commentary seems to suggest that the strong double digit EBITDA margins are likely to sustain. The infusion by Tata Sons (to the extent of Rs6.5bn through a preferential allotment) is a positive. While we remain concerned about JLRs longer term competitiveness at a time when there are rapid technological changes, nonetheless, at this point the risk reward seems favourable. Upgrade to Outperformer with a target price of Rs180 (previously Rs 130).​