Stock corner: ‘Buy’ on Tata Motors, JLR recovery signs highlight of Q2

Consolidated revenue declined ~9% y-o-y to ~Rs 654.3 bn (estimates of ~~Rs 632.2 bn) in Q2FY20. Ebitda grew ~8% y-o-y to ~~Rs 71.6 bn (est. of ~Rs 44.9 bn). Adj. net loss was at ~Rs 1.9 bn (est. of ~Rs 14.8 bn) v/s ~Rs 5.6 bn in Q2FY19. For 1HFY20, revenue/Ebitda fell 8.5%/13% y-o-y; net loss was at ~Rs 37.9 bn.

*JLR – mix, low VME/warranty boost margins: JLR’s performance was strong, with the Ebitda margin at 13.8% (est. of 7.7%)—one of the highest in four years. This reflects (i) a recovery in China and resilient US/EU, (ii) a better mix, (iii) Project Charge delivery, (iv) lower D&A and (e) favourable FX. PBT before EO stood at £166 m (est. of £77 m loss). FCF was negative at £64 m (v/s £623 m in Q2FY19).

* S/A – operating deleverage, write-off in PV business hurt margins: India business was impacted by inventory reduction, resulting in retails coming in higher by ~27k than wholesales in Q2. India business disappointed with an Ebitda loss of ~~Rs 1.7 bn (est. of +~Rs 2.2 bn) due to write-off of ~Rs 2.33 bn in PV and operating deleverage. Adj. net loss was at ~~Rs 13.4 bn (estimates of ~Rs 6 bn). CV/PV inventory was comfortable at 35/48 days.

* Equity issuance of Rs 64.9 bn at ~~Rs 150/sh via preferential allotment to Tata Sons: Tata Motors would issue 201.6 m ordinary shares (amounting to Rs 30.24 bn) and ~231.3 m warrants convertible at ~`150/ sh (worth Rs34.7 bn). Post allotment of ordinary shares/warrants, the promoter stake would rise to 39.5%/43.7% from 35.3%, leading to a dilution of 6.8%. Proceeds will be used to repay debt.

* Concall highlights: (i) China’s KPIs continuing improving, which is translating into improved sales; (ii) Cost-cutting target of £0.85 bn maintained for FY20 (implies a 2H ask-rate of £500 m) through savings in material (£300 m), men(£250 m) and overheads (£300 m);

(iii) Given the impending Brexit, it is targeting to increase FX hedges by 15pp of exposure for three years (to ~50%), four years (to ~30%) and five years (to ~25%). (iv) India’s CV business is showing initial green shoots in demand drivers in the form of freight availability post monsoon, slight firming of freight rates and inquiries from fleet operators ahead of BS6 transition.

*Upgrading to Buy – JLR recovery visible, India worst is behind us: Over the last three years, JLR had suffered from an adverse product (growth led by Jaguar) and market mix (decline in China contribution) and also an increase in capex, resulting in negative FCFF over FY18-20. Finally, we are seeing mix normalising with a recovery in LR and China.

On the other hand, India business appears to have bottomed out in Q2FY20, though a full-blown recovery may be a few quarters away. Hence, we upgrade our EPS estimate for FY21 by ~8% and also our rating from Neutral to Buy with a revised TP of ~`185 (Sep’21 SOTP-based) given the favourable risk-reward.