Tata Motors (TTMT) reported an excellent set of numbers for the quarter ended September 2017, driven by the turnaround of its domestic business, and improved profitability of JLR (Jaguar Land Rover) business. We continue to like the business on the back of reasonable valuations, growth prospects of JLR and the focus of Tata Group’s top management on domestic business revival.
Quarterly result snapshot
Consolidated revenue (net of excise) witnessed a growth of 10 percent and came at Rs 70,156 crore, though lower by ₹2,393 crores due to translation impact from GBP to rupee.
JLR posted a volume growth of 5 percent (YoY) on the back of strong customer demand for Range Rover Velar and other new models. The continued ramp-up of new models led to higher sales and aided EBITDA margin expansion by 660 bps (YoY). The progressive reduction in hedging losses also helped.
What surprised us is the performance of the domestic business. The volumes witnessed a significant growth of 13.8 percent (YoY) on account of strong growth across segments: volumes for M&HCV (medium & heavy commercial vehicles) were up 28 percent, ILCV (intermediate and light commercial vehicle) up 35 percent, SCVs (small commercial vehicles) and pick-ups up 38 percent and PVs (passenger vehicles) up 14.4 percent.
The net operating revenues for the domestic business witnessed a strong growth of 30 percent (YoY) backed by strong volume growth complemented by a favorable product mix. In addition, the accelerated cost reduction efforts also aided in posting an expansion of 360bps in the EBITDA margin.
Why do we see long-term value in the business?
Turnaround of domestic business – started to show results
After the disappointing performance in 1QFY18, the management had mentioned that it had expedited the work on reviving its domestic business and mentioned that they were working to improve market share, reduce cost and launch products on time.
Now, the positive result of turnaround efforts has started showing as is evident from this quarterly numbers. The company gained 1.7 percent (YoY) and 3.9 percent (QoQ) market share in the commercial vehicle segment after witnessing continued decline for long and has achieved highest sales since June 2014. This was, primarily, on the back of new launches and wide acceptance of its SCR technology complemented by the steep production ramp-up.
The management believes that the volume pick-up has started, riding on the positive impact of GST rollout, and the government’s increased focus on infrastructure spending. The management also indicated that the strict ban on overloading would increase the demand for its products.
Moreover, the passenger vehicle segment also witnessed substantial growth and achieved highest sales since November 2012. This was primarily on the back of new launches. The management indicated that the new products like Tiago, Tigor and Hexa will continue to drive sales momentum. Tata Nexon, the newly launched compact SUV has also received overwhelming traction in the market and would add to the positive excitement.
JLR remains strong for long-term
Despite facing headwinds and uncertainties in various global markets, JLR continues to post strong growth in volumes. The management believes that the expanding product portfolio will continue to drive growth.
Moreover, JLR is planning to launch its first PHEV (Plug-in Hybrid EV) by the end of calendar year 2017, first BEV (Battery EV) in 2018 and targeting electrification option for at least half of its existing product portfolio.
Getting ready for the future – Electric Vehicle
Recently, TTMT won the recent tender of supplying electric cars floated by Energy Efficiency Services Ltd (EESL). This order gives a platform for the company to launch itself into the world of EVs, the future cars. Apart from that, the order would provide a good learning experience to the company.
Based on our Sum-of-the-Parts (SOTP) valuation, we see that while most of the value comes from the JLR business, improvement in the India business too will be an added kicker. We advise investors with a long-term investment horizon to accumulate the stock.