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Tata Motors' Q3FY19 results (Neutral) - Another weak quarter

Q3FY19 results highlights

• Operating performance disappoints: Tata Motors reported consolidated EBITDA of Rs60bn was well below expectations. The company wrote off nearly GBP3.4bn of R&D investments to register a loss of Rs270bn.
• Jaguar Land Rover: JLR’s Revenues at GBP 6.2b (-1% yoy) was on account of ~3% yoy decline in wholesale volumes (excluding the China JV). Reported EBITDA margins came in at 7.3% (-180 bps qoq, -350 bps yoy) and were impacted by warranty costs/destocking costs apart from higher incentives, particularly in China. The sequential EBITDA decline came despite a sharp 10% qoq increase in revenues, a partial impact of cost cutting measures (60bps) and favourable currency movements. On an EBIT level, JLR reported a loss of GBP 158mn (est: +260mn) partially on the weak results of the China JV.
• Sharp write down on JLR investments: The management took a sharp write off GBP3.1bn on its investments in R&D on regulatory/technology changes. The write off is equivalent c.30% of JLR and Tata Motors FY18 networth. This would lower the depreciation by ~GBP300mn per year.
• Key points from the concall: (a) Guidance revised downward: The management has revised its guidance downwards to a negative EBIT for FY19 (earlier breakeven) and 3-6% (earlier 4-7%) for FY20-22. If adjusted for the lower depreciation charge due to the write-off, the guidance would be ~2-5%. (b) Cost benefits to felt in Q4: The management expects to realise a majority of its cost cutting benefits in Q4 post the reduction in the workforce (we estimate that all else being constant it could add ~300bps to the EBITDA margins from Q4). (c) China still a work in progress: The management is looking to improve dealer profitability, reduce inventory in China and change JLR from a “push” to a “pull” brand. We believe that the plan is likely to be successful only in the medium term.

Key positives: Recovery in standalone business

Key negatives: Weak margins lower China JV margins

Impact on financials: We cut our FY20 estimates by 23% on lower margins/revenues at JLR.

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 Rs165.