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Tata Motors Rating – ‘Buy’: Cost saving in standalone businesses beat estimates; headwinds in JLR business mar results

Kotak Institutional Equities

Tata Motors reported consolidated adjusted net loss of Rs 19.3 billion in Q3FY19, led by loss in its JLR business due to tough market conditions. Standalone business performance beat expectations aided by the company s cost-reduction initiatives. We believe management is on course to improving operating margins in both standalone and JLR business led by cost-reduction initiatives. We maintain Buy rating but cut our fair value to Rs 280 (from Rs 300 earlier).

JLR Ebitda was 38% below our estimates in Q3FY19
JLR reported Ebitda of 455 million (down 34% y-o-y) in Q3FY19, which was 38% below our estimate of 731 million. Reported Ebitda margin was 7.3% in Q3FY19 (down 260 bps y-o-y) as compared to our estimate of 11.7%. JLR UK business s Ebitda margin declined 354 bps y-o-y in Q3FY19 primarily led by 260 bps negative impact of lower volumes and a weaker geographical mix. JLR China JV reported losses of 16 million in Q3FY19 versus profit of 25 mn in Q3FY18 and 3 mn in Q2FY19.

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Standalone business continues on the path of improvement
Standalone business reported an Ebitda of Rs 13 bn (KIE: Rs 8.9 bn) in Q3FY19, which was 47% above our expectations due to higher-than-expected gross margin and lower other expenses leading to operating leverage benefits. Adjusted net profit at Rs 4.9 bn (KIE: Rs 0.6 bn) was substantially above our estimates. There were extra-ordinary profits below Ebitda of around Rs 1.8 billion, which pertain to forex gains.

Management cut profitability targets for FY20-22
Management has cut its guidance on volume growth of JLR (now expects decline in y-o-y growth) in FY19 and expects loss at Ebit level in FY19. The company also reduced its Ebit margin guidance to 3-6% over FY20-22 versus 4-7% earlier (KIE estimate: 2.4-3.9%). JLR management has initiated a 1 bn cost reduction plan, which will be implemented over the next 12-15 months. JLR has also cut investment spending by 1 bn over FY20 and FY21 and expects to generate 500 million through working capital reduction in JLR. In the standalone business, the company is confident of maintaining 4-6% Ebit margin guidance during this period. The fair value revision is driven by 4-10% cut in our consolidated earnings estimates largely due to cut in JLR s Ebitda estimates.