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Tata Motors: Q1FY18 hit by forex and other costs; LKP Securities prune down target price

LKP Securities | 11 Aug, 2017  | Follow Author | Add to my Favourites 
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Tata Motors- Result Update

Q1 hit by forex, low operating leverage and higher launch costs

Q1FY18 consolidated numbers posted a 11.2% yoy dip at the topline as both JLR volumes as well as domestic business underperformed. At the standalone level, revenues declined by 12% yoy on CV business underperformance, while the company incurred losses at the operating levels itself as operating margins collapsed to 0.7% despite good car business performance. Adjusted PAT at this business slipped into a loss of Rs. 4.7 bn. At JLR, adjusted margins declined to an abysmal level of 7.9% as RM prices went up, operating leverage was low on low volumes and launch costs of new models like the Velar and the new Discovery. JLR incurred huge forex losses of GBP365 mn, which along with high depreciation and tax brought down the adjusted PAT in red territory. Considering the one time pension credit of GBP438 mn, JLR reported came in at GBP472 mn.

Outlook and Valuation

TAMO reported weak set of numbers in Q1, which also happens to be the seasonally weakest quarter for the company. On the domestic front, the company gained market share in the PV segment with the launches of Tiago, Hexa and Tigor. Though the MHCV business is in trouble, going forward with improvement in macros and good monsoons, we expect this business to turnaround. New LCV launch and couple of new platforms in the PV space getting launched along with the SUV launch of Nexon in September 2017 may act as future growth engines for the company on the domestic side. On JLR front, products such as the recently launched LR Velar, E-Pace and I-Pace EV and ramping up of recently launched Discovery may act as triggers to growth. Warm response to F-Pace is already yielding the required results. Strength in US, UK and China may more than offset the blip in Europe and weakness in ROW countries like MENA, Russia and Brazil. China JV is continuously posting strong sales and profitability, which we expect to intensify further. On the profitability front, the deeply negative impact of unwinding of forex hedges felt in Q1 is expected to further reduce hereon as then spot rate of currency will match the hedge rate in the next couple of years. Favorable currency movement may help the cause. Expected higher operating leverage on the back of improving volume mix may ensure that the margins do not drop below Q1 levels. Improving product mix in the form of new launches may provide the impetus. In the domestic business, expected higher CV sales may lift up the margins further. On overall basis, we expect an improved performance from TAMO in the rest of FY18E and FY19E. However, on weak Q1 we prune down our estimates and target price from Rs.  534 to Rs.  483.

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About LKP Securities

What started as one of India’s first securities brokerage houses in 1948 is today one of the country’s largest multi dimensional financial services group. LKP Securities is a Non Banking Finance Company (NBFC) registered with Reserve Bank of India & a listed public limited company having a networth of Rs.142 crores as on FY10. They are India's first financial group to be awarded the prestigious ISO 9002 certified KPMG Quality Registrar, USA, for certain businesses.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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