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Morningstar | Tata Motors Reports Mixed Fiscal 2018 Results; INR 570 FVE Unchanged

Narrow-moat Tata Motors, which is India's largest commercial truck producer and owns the Jaguar and Land Rover luxury brands, reported fiscal first-quarter 2019 ended June 30 diluted earnings per ordinary share of INR 3.48, up INR 4.95 from the year-ago loss per share of INR 1.47. Even so, Jaguar Land Rover, or JLR, performance was disappointing as margin contracted on Chinese consumers delaying purchases for the July tariff reduction, Europe destocking, a new costlier and longer emissions certification process in Europe, as well as a weaker pound relative to other currencies. Tata Motors Ltd., or TML, stand-alone performance was substantially improved, offsetting weaker JLR results, swinging into the black versus a loss in the prior year. Despite the mixed results, we view this stock as attractively valued, currently trading in 5-star territory on a 64% discount to our INR 570 fair value estimate.

Consolidated revenue for the year rose 14% to INR 67,081 crores on a 24% jump in global wholesale unit volume, primarily TML in India. JLR revenue declined 7% on a 5% reduction in wholesale volume while TML revenue skyrocketed 83%. We continue to expect Tata Motors to benefit from demand recovery in its domestic market of India, in which Tata-branded vehicle sales catapulted 59% in fiscal first-quarter 2019, supported by a 50% jump in passenger vehicles and a 69% surge in commercial vehicles.

We expect JLR to benefit from new models recently launched in fiscal 2018, despite market concerns regarding Brexit, as revenue rose 6% on a 2% increase in wholesale unit volume. Increasing 11%, JLR China retail unit volume, including JV partner Chery volume up 23%, was especially strong. For fiscal 2019, we forecast a 10% volume increase, with 3%, 8%, 10%, and 12% unit sales gains in the U.K., Europe, North America, and China, respectively, as JLR enjoys a full year of new model production, increasing availability in major world markets.

Fiscal first-quarter 2019 consolidated adjusted EBITDA margin, which excludes special items, was 7.5%, expanding 50 basis points versus 7.0% margin reported a year ago. Demand recovery is solidly under way in India, resulting in favorable operating leverage as Tata stand-alone EBITDA margin swung dramatically into the black at 8.3% versus a negative 0.6% in fiscal first quarter 2018. JLR stand-alone fiscal 2018 adjusted EBITDA margin, on unfavorable operating leverage with a 5% decline in unit volume, contracted 170 basis points to 6.2% compared with the prior year.

With high costs from a heavy launch schedule now past peak, we expect JLR margins to expand. This past fiscal year, the company launched six all-new or significantly redesigned models. One of which, the I-Pace, is 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. Later this calendar year, JLR will ramp up production at a new assembly plant in Slovakia, creating additional margin opportunity in the second half of fiscal 2019.