Tata Motors reported a second quarter loss of -Rs 4.1 bn; adjusting for a one-off loss, adjusted Q2 PAT has come in at 18.5 bn (-44% y-o-y). Margins at JLR came in lower at 12.2% (-420bp q-o-q) on launch costs, unfavourable product mix as well as an unfavourable FX charge of 80m euros (~160bps). The India business though is well on course for recovery as the Ebitda margin is at 6.7% (+210bp q-o-q).
Our View: We are OW on Tata Motors as the OEM has an aggressive product launch portfolio—both in India and at JLR. Over FY16-17e, we expect Jaguar’s new models i.e. XE, F Pace to drive sales. Further, an improving local economy and new passenger car launches should drive growth in India.
* Conference call takeaways: JLR Outlook—Over H2, the OEM is expected to benefit from healthy growth in Western markets (particularly the US and Europe) as well as from the ramp-up in production of its new models—the XE is being rolled out in the US and China, and Discovery Sport production has commenced in the China JV. October retail has been healthy at +24% y-o-y, which is reflective of product momentum.
JLR has had a robust month in the US, with retail +76% y-o-y at over 8,000 units. While Ebitda margins were impacted over Q2 due to multiple factors, we expect profitability to improve from hereon as production ramps up. The exceptional charge of £245m relates to expenses of the Tianjin explosion.
* India Business: An improving economic outlook and higher utilisation levels are benefiting the local segment as margins have risen to 6.7% in second quarter (+210bp q-o-q). The OEM (original equipment manufacturer) will continue to launch new products to drive sales—it recently appointed Lionel Messi as its brand ambassador for the passenger car segment as it will launch new products over FY16-17. Tata will get more aggressive in the India passenger car segment.
* Price Target: We are revising our Mar-16 based sum-of-the-parts PT to Rs 470 to factor in lower margins at JLR, which is being partially offset by the improving outlook in India.
Key Risks: Increase in discounting trends by luxury OEMs, weak response to new product launches.
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