The operating performance of Tata Motors in the third quarter of fiscal 21 exceeded consensus estimates with a consolidated EBITDA margin of 14.8% (up 444 basis points year-on-year). driven by strong performance in domestic PV / CV and JLR. Tata Motors Management continues to focus on FCF generation (Q3: Rs 79bn), thereby helping to reduce net debt (QoQ: Rs 68bn). Tata Motors Management reiterated its tough (ambitious) goal of freeing net debt by fiscal 24. Tata Motors Management also set a strong domestic PV market share target of> 10% (9MFY21: 7.8%) driven by new SUV product launches (e.g. Safari, Hornbill). Tata Motors remains the market leader in the CV business, which is gradually recovering, and we expect the industry to reach> 30 GR in FY 21-24.
a) Advances in electrification (BEV PHEV share currently 12%)
b) JLR volume increase due to new products / key updates (e.g. Defender)
Standalone sales increased 35% year-over-year to Rs 146 billion, while JLR sales rose 6.5% to 6 Billion GBP declined. JLR’s EBITDA margin improved 506 basis points to 15.8% due to structural cost reductions. The project fee resulted in recurring cash savings of £ 0.4 billion in the third quarter of FY21. JLR reported a record FCF of £ 562m due to tight controls on working capital. The Indian PV / CV business both achieved positive EBITDA margins of 3.8% and 8%, respectively. The India business delivered FCF of Rs.22 billion due to better pricing, lower discounts and tight working capital % versus 78% YoY) and the higher regional contribution of China and North America
b) Tata Motors’ cost savings at VME and the guarantee should be less than 10% in the Indian business. Tata Motors management believes that the pressure on raw material prices can be overcome through price increases, product mixes and structured cost-cutting programs
c) Tata Motors BEV PHEV contributed 30% to sales in the UK EU in the third quarter; There has been a strong response to the new Defender 110 as the current order backlog is more than 3 months of sales. The launch of Defender 90 is expected to further improve volume in fiscal 22nd
d) Tata Motors’ investment in India in FY21E is expected to be Rs 18.5 billion (higher than target of Rs 15 billion) due to accelerated demand for domestic PVs.
ICICI Securities believes that an increased focus on FCF generation coupled with improved positioning of the domestic business is likely to increase the outlook for investor confidence. ICICI Securities believes that reporting a divestment of the PV / CV business could aid its valuation. We are keeping our JLR target multiplier at 2.2x (rollover into FY 23E) and are repeating our BUY rating for Tata Motors with a revised SoTP-based price target of Rs 325 (previous target of Rs 215).
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