November 18, 2013 4:41:23 am
The Tata Motors’ Q2FY14 consolidated operating performance marginally exceeded our expectations (after annualising the lumpy impact of local incentives received at Jaguar Land Rover in Q2FY14). Better-than-expected margins at Jaguar Land Rover more than offset the continued weak margin performance of the standalone business. Whilst we have upgraded our JLR volume and margin estimates (in line with the recent/Q2FY14 trends),continued slowdown in volumes/margin make us downgrade our standalone estimates.
Overall,we have upgraded our FY14 consolidated revenue estimates by 1%,Ebitda (earnings before interest,taxes,depreciation,and amortisation) by 4%,net earnings by 5% and SOTP(sum-of-the-parts)-based valuation to R400 per share (versus R375 earlier). We maintain our positive view on the JLR business and hence we retain our ‘buy’ stance on Tata Motors shares.
While consolidated operating performance marginally exceeded our expectations,consolidated revenues and consolidated Ebitda margin,at 2% and 45 bps,were ahead of our expectations. Consolidated Ebitda exceeded our expectations by 5%. Revenues of the standalone operations were in line,however,Ebitda margin at 0.9% was lower than our expectations of 1.2%,resulting in standalone Ebitda coming in a significant 20% below our estimates. For JLR,while realisations were in line with our expectations,Ebitda margin at 16.6% was better than our expectation of 16.2%,resulting in JLRs Ebitda beating our expectations by 3%. Overall,consolidated PBT (profit before tax) was 5% ahead of our expectations.
Jaguar Land Rover: In Q2FY14,JLR received local incentives of GBP 79 million which is an exceptional item (netted off in other expenses) but would accrue once every year. Raw material costs (y-o-y decline of 172 bps) and employee costs (y-o-y decline of 109 bps) led to Ebitda margin improvement of 178 bps y-o-y (post R&D charge). Ebitda margin (post R&D charge) was at 16.6%. There was a foreign exchange gain of GBP 70 million on revaluation of loans (USD-denominated). The margin for the quarter was helped by (i) better product mix (higher share of new Range Rover and Jaguar F-Type); (ii) favourable regional mix (higher share of volumes from China); and (iii) favourable currency movement (with GBP and Euro depreciating as against USD). JLR continues to stick to its capex plan of GBP 2.75 bn in FY14 towards product development (including new platforms/aluminium architecture) as well as towards setting up of a manufacturing facility in China and a new engine plant in the UK and increasing capacities in existing plants in the UK.
The working capital decreased by GBP 241m during Q2FY14 versus a decline of GBP 99m in Q2FY13. Lower working capital was partially offset by higher capex (GBP 595m versus GBP 444m in Q2FY13),resulting in free cash flow (FCF) for JLR at GBP 430m for Q2FY14 versus GBP 106m in Q2FY13.
Where do we go from here?
The performance of JLR continued to surprise positively. JLR has achieved a volume of 1.92 lakh units in H1FY14,up 20% y-o-y. We believe the new launches and increasing penetration in existing geographies would continue to support JLR volumes. As a result,we are revising upwards our JLR volume estimate for FY14 from the earlier 4.28 lakh units to 4.33 lakh units now,implying a volume growth of 14% y-o-y for H2FY14. We continue to expect a volume growth of 14% y-o-y for FY15.
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