EUR 850.00 For Business Accounts Only

Morningstar | Tata Motors Reports Mixed 2Q Results; INR 580 FVE Unchanged

Narrow-moat Tata Motors, India's largest commercial truck producer and owner of the Jaguar and Land Rover luxury brands, reported a fiscal 2019 second-quarter (ended Sept. 30) diluted loss per ordinary share of INR 3.09, an improvement of INR 2.51 from the year-ago loss per share of INR 5.60. Even so, Jaguar Land Rover's performance was disappointing as margin contracted on softened Chinese light-vehicle demand, declining European diesel demand, and WLTP vehicle emissions certification in Europe. Tata Motors Ltd.'s stand-alone performance was substantially improved, partially offsetting weak JLR results. Despite the mixed results, we think the market has unfairly discounted the stock. The 5-star-rated shares of Tata Motors currently trade at a compelling 67% discount to our INR 580 fair value estimate.

Consolidated revenue for the second quarter rose 3% to INR 72,112 crores on a 5% increase in global wholesale units as TML increases offset JLR declines. JLR revenue sank 11% on a 15% drop in volume while TML revenue skyrocketed 33% on a 24% jump in units. Tata brand vehicle sales grew 23%, supported by a 70% surge in passenger utility vehicles, a 28% jump in light commercial vehicles, and a 23% increase in medium and heavy commercial truck volume. We continue to expect TML to benefit from domestic demand recovery through the remainder of fiscal 2019.

The second-quarter consolidated EBIT margin of 1.7% was disappointing due to JLR losses, contracting 310 basis points versus the 4.8% margin reported a year ago. Even so, demand recovery is solidly underway in India, resulting in favorable operating leverage as the Tata stand-alone EBIT margin dramatically expanded 360 basis points to 4.5% from 0.9% in the year-ago quarter. The JLR stand-alone EBIT margin, on unfavorable operating leverage with a 15% drop in unit volume, contracted 590 basis points to a 0.7% loss compared with the prior year.

We think JLR margin degradation has reached an inflection point. Last year, the company had an unusually heavy product launch schedule with six all-new or significantly redesigned models. One of them is the I-Pace, a pure battery electric crossover, which should see significant demand in China on government incentives. Significantly redesigned Range Rover and Range Rover Sport models are now available with a plug-in hybrid powertrain option. JLR also launched production at a new engine facility in China, and a new assembly plant in Slovakia has begun producing vehicles, creating additional margin opportunity. In fact, management guides to positive free cash flow for the second half of fiscal 2019 after GBP 2.2 billion cash use in the first half.