Tata Motors rating – Buy: A good show in Q4 in the face of challenges

Tata Motors Q4FY22 consolidated Ebitda came broadly in line with our expectations. The near term may pose some challenges for the company; however, given the recent stock price correction, we believe Tata Motors is the best bet to play on global automotive cycle recovery. Also, strong momentum in domestic ICE and EV PV businesses, balance sheet deleveraging and uptick in the domestic CV business should drive strong earnings growth for the company. BUY.

JLR Ebitda 6% below our estimates
JLR reported Ebitda of GBP599 mn (-40% y-o-y) in Q4FY22, 6% below our estimate primarily due to lower-than-expected ASPs. The decline in ASPs can be attributed to (i) an inferior model mix (lower mix of Range Rover family) and (ii) lower geographical mix (lower mix of China). The company reported EBITDA margin of 12.6% led by tight control on cost despite a weaker model mix and cost inflation. The near term may remain challenging due to China lockdowns and supply-chain constraints; however, we expect the company to tide through the crisis given its improved execution over the past few years. With improvement in the supply chain, we expect Ebitda margin to inch up led by (i) operating leverage benefits aided by gradual improvement in the supply chain and a strong order backlog on account of new launches and (ii) cost-cutting initiatives (refocus initiatives).

Domestic CV business performance came in above our expectations
Domestic CV business Ebitda margin increased by 400 bps q-o-q to 6.4% (120 bps above our expectations mainly on account of higher ASPs). However, domestic PV business Ebitda margin increased by 270 bps q-o-q to 6.9% (110 bps below our estimates) in Q4FY22. The company remains upbeat on recovery in PV and CV segment volumes; however, inflationary pressures and supply-chain constraints remain an area of concern.

Fine-tune our FY2023-24E EPS
We have fine-tuned our FY2023-24E consolidated EPS estimates. While the near term may remain challenging for JLR, we believe the company has done well to improve the structural profitability of the business over the past few years. Once chip shortage resolves, we believe JLR is well-positioned to benefit from global automotive cycle recovery. Also, we believe the domestic CV cycle recovery will continue as freight rate continues to firm up and fleet utilisation levels improve. The company’s successful new launches in domestic ICE PV segment as well as growing consumer demand for EV vehicles remains a bright spot for the company. Post recent correction in the stock, risk-reward is favourable and we believe the worst is also priced in at CMP. Maintain Buy; unchanged FV at Rs 470.