FREE

Tata Motors' Q3FY18 results (Neutral) - JLR disappoints; concerns persist

Q3FY18 results highlights

• Standalone shines; JLR disappoints – Tata Motors consolidated 3QFY18 PAT at Rs 11.9bn (Q3FY17:Rs938mn) was below our/consensus estimates of Rs 18.5 bn/Rs30bn. The sharp variance was due to weak JLR margins, higher depreciation and lower profitability from the China JV. This offset a cost efficiency/operating leverage led turnaround in the standalone business (PAT of Rs1.8bn against expectations of a loss).
• Jaguar Land Rover: Revenues at Rs6.3bn (+4% yoy) was lower than estimates as realisations declined 3% qoq partially due to the runoff of the RR/RR Sport models. JLR’s EBITDA at GBP 685mn (+12% yoy) below consensus estimates (GBP 800mn) as EBITDA margins came in at 10.9% (-90 bps qoq, +80 bps yoy; consensus est: 12.4%). Adjusting for a yearly grant from China of GBP45, the EBITDA margins would have been even lower at 10.1%. The favourable mix was offset by higher incentives (6.9% in 3QFY18). Further, the EBIT was impacted by higher depreciation expenses from investment in new models (GBP 137mn), technology and capacity along with lower share of China JV (GBP 25mn;-60% qoq). Notably, JLR registered a negative FCF of GBP 661mn in the quarter in higher capex.
• Key points from the concall: (a) It expects a stronger performance in 4QFY18 in JLR driven by seasonality/ introduction of the new RR/RR Sport. (b)The management acknowledged headwind from competitive intensity, lower margin EV’s and a shift away from diesel. However, it maintained medium term guidance of 8-10% EBIT margins on operating leverage benefits, cost efficiencies and product mix improvement (c) It expects RM cost pressures in 4QFY18 as aluminium prices harden.(d) The company indicated a 6-8% EBIT margin in standalone business.

Key positives: Strong recovery in standalone business

Key negatives: Lower JLR margins/realisations

Impact on financials: We cut our FY18 EPS by 20% to account for the weak quarter. We also reduce FY19/FY20 estimates by 3% – lower JLR volumes offset an improvement in the standalone business.

Valuation & view

While JLR’s Q4 margins likely to be better than Q3 on seasonality/upgrades, nonetheless we note that the car market in USA/UK remains challenging with rising competitive intensity at a time when the company’s recent launches (Discovery) have not been successful. We also note that post the Velar, the new product launches (the E-Pace, I-Pace and PHEV) will have lower margins. The shift towards EVs in the next 1-2 years potentially has a greater negative impact on smaller players such as JLR. Maintain Neutral with a target price of Rs431.