Tata Motors (TML) reported a 35% underperformance in Q1FY20 consolidated Ebitda (down 41% y-o-y) due to lumpy cost at JLR and fall-off in India volumes. On JLR, management reiterated the 3–4% Ebit margin guidance for FY20 (despite a weak Q1) as: (i) the worst is behind in China; and (ii) marketing (VME) and warranty cost would reduce going ahead. The India business suffered from a sharper-than-expected downshift in demand, which management expects to improve ahead. However, demand outlook remains subdued across businesses. On balance, we maintain ‘HOLD/SU’ with a revised target price of Rs 156 (from Rs 167).
Subdued quarter across businesses
Jaguar Land Rover (JLR) reported an Ebitda margin of 4.2%, undershooting our 7.8% estimate due to sharper-than-expected cost pressure (including one-time variable marketing costs (VME), warranty costs and WLTP). We expect both expenses to reduce going ahead. Gross margin for the India business came in at around 28% (higher than 26% that we expected) due to subdued material costs and increase in inventory. Even so, Ebitda margin at 5.5% came in below our 5.9% expectation due to negative operating leverage. That said, we expect margins to improve from now on as cost pressure normalises.
Headwinds persist; cost control critical
TML continues to face multiple headwinds. JLR profitability is affected by the slowdown in China. Brexit uncertainty could further add pressure. The outlook for India business is also hazy both on margin and volumes. That said, strong focus on cost control and cash flows is encouraging.
Outlook: Uncertainty persists
Demand outlook remains challenging, and we expect FCF to remain negative for JLR through FY21; which would cap valuation. We maintain ‘HOLD/SU’, with a revised TP of Rs 156 valuing the India business at 7x December 2020e Ebitda and JLR at 5.5x Ebit. The stock is trading at FY20/21e PE of 12.1x/6.3x.