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Tata Motors (TTMT IN) Summary

Core Content and Key Information

Tata Motors (TTMT IN) is India's largest truck manufacturer and the owner of Jaguar Land Rover (JLR), a luxury car brand acquired from Ford in 2007. The company is currently experiencing a challenging period, primarily due to temporary factors affecting JLR's performance, such as the implementation of new emission standards in the EU, high taxes on diesel vehicles in the UK, and import duty cuts in China. However, the document highlights that these issues are expected to subside by 2H FY19, leading to an improvement in overall performance.

The domestic business is showing significant improvement, with EBITDA reaching INR14.6b in 1QFY19, a notable increase from the previous year's loss. The company's domestic operations are expected to contribute 14% of EBITDA for the full year. The company has also launched new models such as Tiago, Hexa, and Nexon, which are contributing to market share gains in the passenger vehicle segment. Additionally, the commercial vehicle (CV) segment is performing well, driven by rising demand in rural areas and the infrastructure sector.

Main Points and Key Views

1. JLR Performance and Outlook

• 1QFY19 EBITDA: GBP325m (-26% YoY)
• Volume Decline: 7.7% YoY due to temporary factors
• Margin Issues: EBITDA margin of 6.2% (-170bps YoY) due to incentives, start-up costs, and de-stocking
• Improvement Forecast: JLR volume and profitability issues are expected to diminish by 1HFY19, with EBITDA margin returning to a normal level of 4-5%
• Volume Growth: Expected to grow by 7% in FY19 and 6% in FY20, driven by strong demand for E-Pace and I-Pace models

2. Domestic Business Recovery

• 1QFY19 EBITDA: INR14.6b vs a loss in the same period last year
• EBITDA Margin: Improved for both commercial vehicles (11.7%) and passenger vehicles (almost profitable)
• Volume Growth: Forecasted at +15% for FY19 and +12% for FY20 for passenger vehicles
• Truck Demand: Rising in rural areas and the infrastructure sector

3. Financial Performance

• 1QFY19 Revenue: INR670,813m (14.7% YoY increase)
• 1QFY19 EBITDA: INR54,307m (+9% YoY)
• 1QFY19 Operating Profit: -INR4,265m
• Pretax Profit: -INR25,842m
• Net Profit: -INR19,024m
• Core EPS: INR29 (up from INR21 in 1Q18)
• Core P/E: 8.5x (FY19E)
• EV/EBITDA: 3.0x (FY19E), trading at 3x EV/EBITDA, which is at a 52-week low

4. Valuation and Investment Outlook

• SOTP Valuation: INR422 (12m price target), which is 70% above the current price
• Tata Motors Finance: Strong performance with ROE of 18-20%, potential for monetization or listing
• Tata Technologies: Another subsidiary with potential for listing or partial sale to a strategic investor
• Dividend Yield: Expected to increase to 0.2% in FY20E
• ROAE: 9.9% (FY19E), with an expected increase to 12.7% by FY21E

5. Market Share and Strategic Initiatives

• Market Share: CV segment is a major contributor (~56% of volume), while PV segment is growing (~31% of volume)
• New Models: E-Pace, Velar, and upcoming I-Pace are contributing to market share gains
• Strategic Partnerships: Collaboration with Waymo could boost I-Pace sales to 20k units
• Cost Savings: Shift to low-cost plants in Slovakia, China, and India is expected to reduce production costs

Key Catalysts for Improvement

• Brexit Impact: Less than expected impact, leading to a positive outlook
• Normalization of Demand: Expected in EU and China
• Domestic Recovery: Strong domestic business performance and consistent EBITDA contribution

Risk Factors

• Currency Risk: Prolonged effects on profitability
• Global Trade Policies: Potential impact on operations
• Emission Norms: Compliance risks in the EU
• Excise Duty Cuts: Increased marketing expenses in China
• Brexit Uncertainty: Continued impact on premium car sales in the UK and Europe

Conclusion

Despite the challenges faced in the first quarter of FY19, particularly in the JLR segment, Tata Motors is positioned for recovery, especially in the domestic business. The company's long-term strategy includes investing in new models, technology, and manufacturing capabilities to strengthen its position in the market. The SOTP-based valuation suggests that the company is undervalued, and the 12m price target of INR422 reflects the potential for a significant upside. The outlook remains positive, with the expectation of improved performance in the second half of FY19 and beyond.