Improving JLR outlook, margin expansion targets positives for Tata Motors- QHN

Tata Motors’ 2022-23 (FY23) January-March quarter (fourth quarter, or Q4) results were better than Street estimates, with strong showing across Jaguar Land Rover (JLR), as well as commercial and passenger vehicle businesses in the domestic market. The company posted its highest consolidated top line and operating profit, with growth of 35 per cent and 46.5 per cent, respectively, over the year-ago quarter.

While the top line was aided by a 49 per cent growth in the JLR unit, all key segments reported margin expansion. JLR accounts for over 80 per cent of the consolidated revenue. Given good Q4 showing, improving volume outlook, falling debt levels, and margin performance, brokerages have upgraded their earnings estimates for 2023-24 (FY24).

Volumes for the JLR unit crossed 100,000 units in the quarter and were up 20 per cent on-year, while realisations, too, were up 20 per cent.

The order book for JLR remains robust at 200,000 units, with three-fourths of the pending orders for the Range Rover, Range Rover Sport, and Defender. With a production ramp-up, the company expects the order book to reduce at the rate of 5,000 units per month. Easing supply situations and steady demand are expected to help the company post a wholesale volume of 400,000 for FY24 (compared with 321,000 in FY23).

While margins at the earnings before interest and tax (Ebit) level for JLR were up 450 basis points (bps) to 6.5 per cent, it has guided for margins at 6 per cent for FY24 (2.4 per cent in FY23). While margins will benefit from lower raw material costs, what could offset this is a moderating product mix, adverse foreign exchange, higher marketing costs, and discounts.

The company hopes to reduce net debt by £1 billion in the current year, compared with a debt of £3 billion in FY23 on the back of improving operating cash flow.

In the standalone (India) business, revenues were up 16 per cent, while operating profit margins were up 389 bps to 10.3 per cent. Ebit margins in the commercial vehicle business at 8.7 per were the highest in 21 quarters on account of moderation in discounts, cost reduction, and lower commodity prices.

Analysts of Emkay Research, however, say that the company’s commercial vehicle business disappointed, with muted operating profit margin expansion (10.3 per versus expectations of 10.8 per cent), notwithstanding the benefits of operating leverage (21 per cent increase in on-quarter volumes), softening commodity prices, and lower discounts.

The company expects the domestic commercial vehicle sector to grow in single digits in FY24. The current quarter, however, could see a decline in volumes, given the pre-buying in the March quarter.

Revenue growth for the passenger vehicle segment came in at 15.3 per cent and was aided by a 10 per cent increase in volumes. Margins expanded by 40 bps to 7.3 per cent. The company expects the sector to grow 5-7 per cent, given a higher base and multiple headwinds such as inflation, high-interest rates, and incremental costs due to the impact of regulatory policies. The company seeks to improve passenger vehicle profitability (target to hit double-digit margins from 6.4 per cent in FY23).

Tata Motors, according to Motilal Oswal Research, is expected to witness a healthy recovery as supply-side issues ease (for JLR) and commodity headwinds stabilise (for the India business).

Tata Motors will benefit from the commercial vehicle upcycle, stable growth in passenger vehicles, company-specific volume and margin drivers, a sharp improvement in free cash flow, and a reduction in net debt in both JLR and the India businesses.

The Tata Motors stock is up 8 per cent over the past six sessions and ought to react positively to its results on Monday. Given that the target prices are in the Rs 550–650 band, there are gains at the upper end.


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