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Tata Motors - JLR future proofing itself with rapid electric transition - ICICI Securities

Posted On: 2021-02-28 23:12:45 (Time Zone: Arizona, USA)

JLR's management shared details of its electrification strategy at its annual investor day (26th Feb). The key takeaways include: a) Pivoting portfolio towards focussed luxury (away from mass luxury) with Jaguar pure BEV platform leading the technology transition; b) zero pure-ICE model sales by FY26; c) platform consolidation (6 down to 3) will be key to creating quality, cost efficiency; d) thus, capex spend will be ~£2.5bn, to include all the required EV investment; and e) confident of achieving financial targets of ≥7%/10% EBIT margin by FY24/26, respectively. We were impressed by the coherent framework laid down by the management towards achieving customer delight via high quality aspirational EV products while keeping profitability at the centre of capital allocation. JLR is prioritising quality, technology over volumes (moving away from the Big-3 German players); we believe investors also need to include other luxury EV players (e.g. Lucid, Nio) for a holistic peer valuation analysis. Maintain BUY. Further highlights of the event:

- Jaguar brand will be positioned as an all-electric (by FY25) modern luxury brand with focus on radical design and best-in-class technology to attract a younger customer base vis--vis its past. The management also expects ~60% Land Rover sales to come from electric segment by FY30, while in the next 12-18 months' new model launches of RR/RR-Sport/Defender-130 are likely to drive growth.

- Refocus programme takes over from project Charge (generated lifetime savings of ~£6bn), is designed to deliver incremental £2bn/4bn of cost reduction in next 3/5yrs, respectively. Few of these potential savings are likely tied up with platform improvements (e.g. reduced warranty, material costs) while other big-data analytics initiatives (InDigital) could significantly improve the quality of sales.

- Capital investments will remain at ~£2.5bn till FY25 (FY26: ~£3bn), and will encompass the three new platforms (MLA Flex, EMA native BEV, Pure BEV) and other new technology investments. We believe the move away from ICE technologies towards future technologies (EVs, hydrogen) on investments could aid JLR's terminal value.

- The management clearly emphasized that its guidance on various financial targets has room for positive surprise: a) EBIT margin ≥7%/10% in FY24/26, respectively, b) zero net debt by FY24, c) strong FCF pre-restructuring costs FY22 onwards, d) FY26 revenue target of >£30bn (>8% CAGR FY21-26). We have raised our JLR EBIT margin estimate to 6.0% (earlier: 5.3%) for FY23, yet well below the management guidance of ≥7% EBIT margin in FY24.

- Emphasis on collaboration and knowledge sharing with Tata group on clean energy, connected services, data and software development. Tata group has other strong organizations in its portfolio which can aid JLR/TTMT in its electrification mission.

- The transition needs the origination to right size operations (e.g. Castle Bromwich plant will be repurposed in FY24), hence, it is incurring a non-cash charge of ~£1bn towards erstwhile platforms along with ~£0.5bn restructuring cost due to headcount reduction. Overall, next 5 years' capacity is likely to be reduced by 25%. However, D&A expenses going ahead would be lower by ~£150mn annually.

Valuation and risk

On JLR's side, we believe, the coherent yet bold strategy to transition into a pure play electric vehicle luxury car brand is likely to be one of the most significant decisions the new JLR management team may ever take. This provides a clear direction for future capital deployment towards clean technologies (EVs, hydrogen) and ADAS though without losing the focus on profitability and quality. The deleveraging plan ('net debt zero') by FY24 is possible, and depends on JLR's ability to deliver on its EBIT guidance (≥7%).

On domestic business, we believe, the decision to aggressively focus on new products, high-growth segments (SUVs) and new technologies (EVs) bodes well for long-term prospects for TTMT's India PV business. Improving margins and FCF trajectory may also aid in valuation improvement. CV business continues to remain strong with a multi-year growth cycle in the offing led by recovery in infrastructure demand. CV business is likely to enjoy industry-leading margins and FCF generation over the next few years.

We further raise our target JLR multiple at 3.5x (earlier:3.0x) EV/EBITDA as we include other luxury EV players (e.g. Nio/Lucid) for our relative valuation analysis along with the Big-3 German incumbent luxury car manufacturers. We also raise our target multiple for India PV businesses on the back of rising market share trends. We value the CV business at 14.0x EV/EBITDA (unchanged) and PV business at 8.0x (earlier: 6.0x) EV/EBITDA. We reiterate our BUY rating on the stock with a revised SoTP-based target price of Rs457 (earlier: Rs389).

Downside risk: Management deviation from the path of pure-electrification in JLR.

Upside risk: Faster-than-anticipated improvement in domestic CV cycle.

Shares of TATA MOTORS LTD. was last trading in BSE at Rs.323 as compared to the previous close of Rs. 333.1. The total number of shares traded during the day was 4893904 in over 37422 trades.

The stock hit an intraday high of Rs. 333 and intraday low of 318.8. The net turnover during the day was Rs. 1589257084.

Source: Equity Bulls

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