Tata Motors
Rating: BUY
JLR reported Ebitda growth of 68% year-on-year in Q1FY15, which was 24% above our estimates led by lower other expenses. The company indicated that other expenses were lower by GBP 100m excluding forex gains on a quarter-on-quarter basis due to lower marketing costs because of a superior product mix. We maintain our Buy rating on the stock as we believe volume growth of JLR will continue to surprise the street led by new model launches. We have raised our target price to R590 (from R575) as we have increased our JLR Ebitda (earnings before interest, taxes, depreciation and amortisation) margin assumptions.
JLR surprises on publicity expenses: JLR reported net profit of GBP693m (+128% y-o-y) that was 53% above our estimates. JLR reported 68% y-o-y growth in Ebitda in Q1 driven by 31% y-o-y increase in revenues and 450 bps y-o-y expansion in Ebitda margin. The key surprise was lower-than-expected other expenses, which declined sharply q-o-q led by lower publicity expenses despite a 5% q-o-q fall in volumes. JLR said this was due to superior product mix, which lowered marketing costs.
Other expenses included GBP 98m forex gain on hedges in Q1FY15 vs GBP80m gain in Q4. Adjusted Ebitda was up 253 bps q-o-q, which largely came from GBP100m q-o-q decline in other expenses like publicity, etc.
Standalone business under pressure: Standalone business reported an adjusted profit before tax loss of R11,302m in Q1, higher than our estimate of R10,241m, led by a 15.4% y-o-y fall in net sales. Ebitda margin in standalone business at -3.9% declined by 510 bps y-o-y as passenger vehicle losses increased. We expect standalone Ebitda margin to improve over coming quarters due to lower discounting for commercial vehicles and pick-up in volumes of passenger vehicles led by the Zest launch.
Street underestimating JLR model launch potential: We maintain our Buy rating on the stock as we continue to expect positive surprises on JLR volume growth. We expect new launches to improve JLR volume growth. Jaguar XE and Jaguar SUV will be the key launches over the next two years. We have increased our consolidated earnings estimates by 5-11% over FY15/16e. We have thus increased our target price to R590 (from R575) based on sum-of-the-parts valuation methodology.
JLR reports sharp jump in profitability: JLR reported a net profit of GBP693m. It reported a GBP70m gain due to translation impact on foreign-denominated debt, which was below Ebitda, and a gain of GBP98m on hedges/ revaluation of current liabilities, which was classified above Ebitda. JLR reported a 68% y-o-y growth in Ebitda in Q1FY15 driven by 31% y-o-y increase in revenues and 450 bps y-o-y expansion in Ebitda margin.
Key highlights of JLR in Q1
* Wholesale volumes grew by 27% y-o-y; Jaguar volumes grew by 5.4% while Land Rover volumes were up 33.
* Range Rover and RR Sport volumes rose sharply? RR wholesale volumes were at 13.8K units versus 10.3K units in Q1FY14, while RR Sport wholesale volumes jumped to 19.6K units versus 6.7K units in Q1FY14. We expect both these models to be the key driver of JLR volumes in FY15e. Both have waiting periods of 5-6 months across markets.
* China is the best-performing market for JLR with growth of 77% y-o-y in Q1. Europe (ex-UK) reported 16% y-o-y growth in volumes. UK and North America increased by 13% and 23% y-o-y.
* Average selling price (ASP) increased by 2.8% y-o-y due to richer product and geographical mix, partially offset by negative impact of currency.
* Other expenses to net sales declined sharply by 250 bps q-o-q while staff costs rose by 19% y-o-y as JLR continues to ramp up capacity. Other expenses declined sharply q-o-q led by lower publicity expense.
* The company has hedged 85% of its $-denominated revenues in FY15 and 50% of its $ revenues in FY16. We expect a negative 150 bps impact due to currency fluctuation in FY16 partially offset by operating leverage benefits due to higher volumes.
* R&D spend was GBP326m and capex spend was GBP356m in Q1. JLR posted a modest free cash flow of GBP5m. Gross debt stood at GBP1,989m and cash and cash balances stood at GBP3,301m. The company expects JLR to be free cash neutral in FY15.
Standalone operations continue to languish amid weak
CV cycle
* Standalone business reported adjusted PBT loss of R11,302m in Q1FY15 and net sales of R77 bn.
* Total sales volumes fell 28.2% y-o-y led by continued weakness in the CV (commercial vehicle) cycle and market share loss in the passenger car market. Export volumes declined by 10.6% y-o-y in Q1 but the company expects to increase export volumes in FY15 with entry into new markets like Africa and South East Asia.
* Net sales declined sharply by 15.4% y-o-y, which impacted profitability due to negative operating leverage. Average realisations increased sharply by 15.3% y-o-y in Q1FY15 reflecting higher share of MHCV/LCV in the product mix.
* Gross margin declined by 140 bps y-o-y led by increase in losses in the passenger vehicle business. Staff costs declined marginally by 1.1% y-o-y while other expenses declined by 4.8% y-o-y. Ebitda margin improved sequentially to -3.9% versus -7.5% in Q4FY14 as Q4FY14 had write-offs and payment to vendors. We expect standalone Ebitda margin to improve as commercial vehicle cycle has bottomed out and improving.
* The standalone entity has accounted for R15.5 bn of income as dividend received from JLR.
* The company plans to spend R30 bn every year over the next three years in standalone business, mainly for developing new products for the car business.
We expect China JV to turn PBT breakeven in FY17e JLR is setting up a capacity of 130,000 units with Chery in a 50:50 joint venture in China. It is scheduled to start production by end of CY14. We have assumed 30,000 units and 62,000 units of volumes in FY16/17e from the JV. The company will likely produce Evoque, Freelander and XF from this joint venture initially.
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