Tata Motors 4Q earnings at Rs43.2bn were ahead of consensus estimates of Rs36bn on better than expected margins at both JLR and at the standalone level.
- Management has changed the accounting for its realised forex related to revenues from 4Q onwards. Its forex hedge loss related to revenues is now accounted for in the revenue line item. This change in accounting policy has led to improvement in EBIDTA margin by ~60bps, as per the management.
- Revenue grew 10% yoy to GBP7.3bn and was driven by 6% growth in volumes and 4% growth in average realisations.
- On a region-wise basis, growth was driven by North America (+9% yoy), Europe (+12% yoy) and UK (+10% yoy). However, sales to China and other markets declined 5% yoy declined.
- For FY17, total JLR sales were up 5% yoy to 534,746 units and sales were driven by 21% yoy growth in North America, 9% growth in Europe and 4% growth in UK. While its China sales declined 4% yoy, its other market sales declined 12% yoy in the fiscal.
- EBIDTA margins in 4Q were up 80bps yoy to 14.5%. Management did indicate that ~60bps benefit was on account of its change in forex accounting and some part of improved margins is also due to 4Q being a seasonally strong quarter for JLR in terms of volumes.
- Regarding forex impact for 4Q, JLR witnessed a GBP 323mn positive swing in revenues due to GBP depreciation in 4Q and it saw a GBP326 mn realised loss on its forex hedge book. Thus, these two line items nearly offset each other in 4Q. It also recognised a GBP108mn worth of realised forex gain on account of revaluation of current assets and liabilities. The same is tabulated in the table below.
- Overall, JLR PAT for the quarter grew 18% yoy to GBP 557mn led by improved margins. The break-up of key earnings levers for JLR in FY17 are as highlighted in the chart below.
- TTMT’s standalone performance was also ahead of estimates as the loss reported in 4Q was much below estimates.
- Standalone revenue grew 8% yoy to Rs136bn led by 3% yoy growth in volumes and 5% yoy growth in average realisations. Avg realisations would have improved due to an improved mix in favour of higher MHCV sales in 4Q.
- As a result of improved mix, EBIDTA margins improved 260bps qoq to 4.1% (down from 8.1% in 4QFY16 due to record high discounts in the current fiscal).
- Overall, the loss at the standalone level was much lower at 7.9bn (compares to consensus estimate of Rs10bn loss for 4Q)
Outlook – JLR
- New product launches on the anvil include: 1) the recently launched new Discovery in Feb2017 which is now witnessing a gradual global ramp-up 2) Jag XF Sportsbrake variant to be unveiled in June017 3) Velar is likely to be launched in Sep2017 4) the new RR and RR Sport would be available in dealerships from Jan2018 (should appear in wholesale volumes from 3Q onwards). As a result, there is likely to be slower volume growth of RR and RR Sport in 1HFY18. JLR also plans to launch its first Electric vehicle, the I Pace, in 2018. They may also plan to launch a facelift of the Evoque in 2018.
- Despite increased geo-political uncertainty (e.gBrexitin the UK), major markets including China, the US, Europe and the UK continue to see solid economic growth with only selected markets such as the Middle East, Russia and Brazil showing more fundamental weakness.
- Management continues to guide for 8-10% EBIT margin guidance over the medium term. JLRexpects margin pressures seen in FY17 and historical seasonality of volume and profit by Quarter to continue in FY18. The key reason for sustained margin impact in the near term is the sustained high level of incentives prevailing in its key markets.
- Favourable operating exchange with growing volumes is generally expected to continue to offset hedging losses in FY18 and at 31 March exchange rates (e.g$1.246), hedging losses would be expected to start to reduce in Q4 FY18
- The new Slovakia plant is expected to commence production from 1QFY19 onwards. The first phase of this new plant would have a capacity of 150k units which would be eventually doubled in phase II.
- The second phase of China JV would commence from mid-2018 and would ramp-up the JV’s capacity to 210k units on a 3 shift basis from the current 130k units. Management plans to launch Jag XE and the new E-Pace (crossover of Jag XE) in the China JV in 2018.
- The capacity at UK is ~600k units and can be increased by another 10-20% by debottlenecking. The Brazil plant is already operational and has a capacity of 24k units. The total installed capacity at JLR by 2020 would be about 1mn units.
Outlook – standalone entity
- For the first time in many years, the management has given a detailed presentation on the standalone entity and earmarked on how they intend to revive their lost share in both CVs and PVs in the coming years.
- The recovery of the standalone entity profitability would be based on 4 broad parameters: 1) Intense topline focus 2) agile cost management 3) structural improvements 4) Customer Centricity
- TTMT standalone business is undergoing an organisational realignment wherein they are reducing the managerial levels to just 5 from 14 in an effort to make the organisation much leaner. The headcount reduction upto June2016 has already been ~12% which has led to benefit of Rs300crs
- They also intend to focus on improving efficiency and quality of the standalone entity through various productivity measures
- They also intend to rationalise its vendor base substantially. They target to reduce its vendor base by ~50% in the next couple of years.
Commercial vehicle segment strategy
- They intend to recover 500 bps market share over the next 2 years. A clear red flag for Ashok Leyland (we have a Sell rating on the stock)
- Management has identified specific product gaps in both MHCVs and LCVs.
- For the same, they target to launch 6 new products in MHCVs in FY18 (apart from ramp-up of 4 new launches in FY17) and they intend to launch 4 new products in ILCV segment in FY18 (along with ramp-up of 5 launches in FY17)
- They intend to expand their customer sales touch points to 1572 outlets (from 1484 in FY17) in FY18 and its number of service touch points to 1969 outlets (from 1881 outlets in FY17)
Passenger vehicle business strategy
- Their roadmap for new product launches till 2022 is ready which would include full benefits of the new modular platform and structural cost reduction benefits. The next new product launch would be compact SUV Nexon (addressable market grows from 60% to 75% in the PV segment) closer to the festive season
- They have already reduced its 6 platforms to 2 including the all new Advanced Modular platform which is highly flexible
- As a mark of its efforts put in the last few years, TTMT has been ranked no 2 in the JD Power CSI score.
- They intend to expand their customer sales touch points to 760 outlets (from 645 in FY17) in FY18 and its number of service touch points to 650 outlets (from 528 outlets in FY17)
Other Conference Call highlights
- The share of JLR profit at the China JV increased to GBP151 mn from GBP64mn yoy as volumes more than doubled to 65k units in FY17.
- JLR has paid a dividend of GBP150mn to Tata Motors, consistent with its previous years
- The total debt at JLR stands at GBP3.6bn (cash of GBP5.5bn)with a well spread out maturity profile over the next few years.
- The FCF for the quarter stood at GBP804mn post a capex of GBP1bn. JLR also managed to remain FCF positive with FCF of GBP295mn in FY17 after a capex of GBP3.4bn.
- On account of a shortfall in spend in FY17 (earlier guidance was of GBP3.75bn), the capex guidance for FY18 now stands at GBP4bn. Of this, ~GBP1bn would be invested in the new Slovakia facility which is expected to commence production from 1QFY19 onwards.
- At the China JV, currently, 40% is localised content which should increase to 65% with the start of engine production in the JV by the end of FY17.
- The management has entered into an agreement in Apr2017 to changes in its defined benefit pension plan including moving the basis from final salary to career average salary. This change is expected to lead to a positive gain of GBP400mn which would be reported in in 1QFY18
Fig1: JLR Quarterly Performance Fig2: TTMT Standalone Quarterly Performance
Fig3: TTMT Consolidated Quarterly Performance
Fig4: JLR Model Mix (%)
Fig5: JLR Geographical Mix (%)
Fig6: Foreign Exchange impact – Benefit from favourable currency offset by loss on Hedge book
Fig7: Realised Forex hedge loss trend
Fig8: PBT break-up yoy: Favourable volume/mix offset by net pricing and higher input costs