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Tata Motors' Q4FY19 results (Neutral) - Inline results; muddled outlook

Q4FY19 results highlights

• Operating performance a tad below: Tata Motors reported consolidated EBITDA of Rs80bn was ~5% below expectations. While JLR margins largely met consensus expectations; standalone profitability fell short of estimates. The reported PAT of Rs 11.18bn (-47% yoy) benefitted from a lower tax rate/depreciation and forex gains that offset severance linked one off expenses.
• Jaguar Land Rover: JLR’s Revenues at GBP 7.1b (-6% yoy) was on account of ~7% yoy decline in wholesale volumes (excluding the China JV). Reported EBITDA margins came in at 9.8% (+250 bps qoq, -350 bps yoy). The sequential EBITDA improvement largely reflects operating leverage (Q4 typically has the highest EBITDA margins) even as gross margins remained stressed. The China JV continued to report a loss as the company attempts to turn around the JV. On an EBIT level, JLR reported a profit of GBP 217mn (down 58% yoy; EBIT margin 3%) as lower depreciation (on account of a write off in Q3).
• Key points from the concall: (a) FY21 guidance revised downward: The management stated that FY21 would also be FCF negative. This is due to the runoff of high margin RR and RR Sport models –the runoff would also have an impact on profitability in FY21. (b) Cost benefits to felt in Q1: The management expects to realise a majority of its cost cutting benefits in Q1 post the reduction in the workforce – it has already realised GBP150mn of benefits and looks to gain another GBP400mn from workforce reduction. The management though expects to register a loss in Q1FY20 (Q1 is a seasonally weak quarter) (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 the plan is likely to be successful only in the medium term.

Key positives: Lower than expected depreciation in JLR

Key negatives: Lower profitability in the domestic business

Impact on financials: We cut our EBITDA estimates for FY20/21 by 4%/1% respectively. This is however offset by lower depreciation leading to FY21 EPS estimates increasing by 12%.

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 which come at a time when global peers are increasing capex/expenditure to counter disruptive technological changes could impact JLR’s long term edge. Maintain Neutral with a target price of Rs175.