EUR 850.00 For Business Accounts Only

Morningstar | TTM Updated Forecasts and Estimates from 08 Feb 2019

Narrow-moat Tata Motors, which is India's largest commercial truck producer and owns the Jaguar and Land Rover luxury, or JLR, brands, reported fiscal third-quarter 2019 ended Dec. 31 diluted losses per ordinary share of INR 79.49, but excluding special items that included an INR 27,838 crores JLR impairment charge, losses per share were INR 3.78. JLR performance continues to disappoint. Tata Motors Ltd. stand-alone, or TML, performance significantly 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 are attractively valued, currently trading at a compelling 68% discount to our INR 580 fair value estimate.

Consolidated revenue for the fiscal third quarter rose 5% to INR 77,001 crores on a 5.5% decrease in global wholesale units as TML declined 0.5% while JLR dropped 11.0%. JLR revenue increased 12% due to currency translation to INR but in GBP, revenue declined 1.4%. TML commercial vehicle sales softened in the last two months of the quarter on new axle load limits, higher fuel prices, and reduced credit availability. Even so, TML passenger vehicle unit volume increased 3.3% during the fiscal third quarter. With a 10% increase in sales volume, TML sport utility vehicles led unit volume growth. Credit availability and higher fuel prices may crimp passenger vehicle sales going forward.

Fiscal third quarter 2019 consolidated EBIT margin of 0.1% loss was disappointing due to JLR's poor performance, contracting 370 basis points versus 3.6% margin reported a year ago. Even so, demand in India, resulting in favorable operating leverage as TML EBIT margin expanded by 70 basis points to 4.3% versus 3.6% in fiscal third quarter 2018. JLR fiscal 2019 EBIT margin, on unfavorable operating leverage with an 11% drop in unit volume, contracted 520 basis points compared with the prior year, to a 2.6% loss.

We think JLR margin degradation troughs in fiscal 2019 with modest expansion during fiscal 2020. Last year, the company had an unusually heavy product launch schedule with 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 and a new assembly plant in Slovakia has begun producing vehicles, albeit at lower than normalized rates. However, we forecast cash burn (cash flow from operations less capital expenditures and capitalized development) as JLR continues to experience weakening Chinese light vehicle demand, declining European diesel demand, market disruption from WLTP vehicle emissions certification in Europe, and higher spending for powertrain electrification and autonomous technologies.