Tata Motors Rating: Buy | Disappointing qtr; focus shifts to Q4 By Nuvama research Auto major tata Motors’ (TML) total consolidated revenue jumped 29.7% in Q2 to Rs 79,611 crore which was in line with the Street expectations of Rs 79,644 crore. The company turned in Q2FY23 Ebitda of Rs 62bn, missing our estimate by 28% as margins disappointed across businesses. Besides, Q3 volume ramp-up guidance for JLR is muted. Management has indicated a marginal ramp-up in H2FY23 volume for JLR over H1. JLR is targeting to be FCF-neutral in FY23 versus an FCF-positive guidance earlier. Hence, we are lowering consolidated FY23e/ FY24e (estimates) Ebitda by 11%/7% (due to JLR, which is ~75% of consolidated Ebitda). Retain ‘BUY’ with an sum of the parts (SoTP)-based TP of `502 as we roll over the valuation to Mar-24E (estimates). JLR: Elusive volume ramp-up; India better placedFor JLR, the last three quarters have been precarious due to semiconductor uncertainty, model changeovers of RR and RRS, and ongoing China lockdown. As these issues are getting addressed, tailwinds from the new RR and RRS along with strong demand for Defender filtering into the P&L should compensate for disappointment. The strong product cycle tailwind in JLR keeps our hopes alive. Outlook and valuationIndia and JLR have tailwinds of cyclical recovery and product-cycle. This should aid balance sheet improvement. We maintain ‘BUY/SO’ with a TP of Rs 502. Also Read: Tata Motors stock rating ‘Buy’: Product mix, demand to help, say brokerages; check recos, share price targets Key takeaways of conference call: JLR Demand outlook remains strong. Order book marginally increased to 205k from 200k. However, net order addition in the quarter was lower than 100k run rate. It stood at 92kAlternate solution identified for chips and has entered into long term arrangement to secure future supply. However, Q3 volumes will see marginal rampup over Q2. From Q4 onwards meaningful rampup should be visible. Chips issue is likely to linger for reasonable time for the industry before it normalisesExpect some increase in variable marketing expenses (VME) given that they are at significantly lower.Pension liability has actually seen rise in surplus quarter on quarter. It is closer to £1 bn IndiaDemand outlook remains healthy.FY24 PV volume growth: Expect the growth to normalise driven by new product and intervention. Pent demand will be largely met in FY24Margin: clear focus on double digit margins in commercial vehicles (CVs). Hence would like to retain the benefit of commodities as well as focus on cost reduction initiatives.Share of CNG in ICVs (intermediate commercial vehicles) has declined to ~15-17% from 40% a year back I&LCVs due to reduced arbitrage post sharp jump in CNG prices. The price gap differential has narrowed from Rs 44 to Rs 15.
The Japanese pharma major is also filing a plea before the Delhi HC seeking appointment of forensic auditors to analyse transactions involving IHH, Fortis Healthcare and RHT, Singapore, as directed by the HC on October 18.
The development is likely to create legal hurdles and delay the proposed open offer as IHH had recently told FE that it could only go ahead if Sebi agreed with its legal interpretation that the SC’s September 22 order has lifted all such restraints.
IHH managing director and CEO Kelvin Loh told FE on November 9 that the company would like to go ahead with the open offer “as soon as possible” as there has already been a delay of four years. Ravi Rajagopal, chairman of Fortis Healthcare, had added that their legal counsel has advised that the company can go ahead with the open offer as the SC order has disposed of various appeals, including the suo motu contempt. “We have represented to the Sebi and the matter is with them,” Rajagopal had said.
However, legal observers told FE that the matter is not that straightforward and simple as the Delhi HC has to take the final call on the matter of open offer as well as whether a forensic audit has to be done in the share sale which was executed in 2018.
Also Read: IHH to float open offer for Fortis if Sebi concurs with our legal view: MD & CEO
Loh and Rajagopal had said the possibility that the matter may take a different turn when it comes up in Delhi HC cannot be ruled out.
IHH had in July 2018 acquired a 31% stake in Fortis Healthcare for Rs 4,000 crore through the bidding route. It had also earmarked Rs 3,000 crore to make an open offer for an additional 26% to the public shareholders as required under the law.
Daiichi has written to Sebi that the SC in its September 22 order had asked the HC to consider ordering a forensic audit into the dilution of FHL shareholding, repeated violation of undertakings and assurance by former FHL promoters — Malvinder and Shivinder Singh — and the transaction between FHL, IHH and the clandestine transfer of Rs 4,666 crore to RHT Singapore.
Daiichi is “severely prejudiced” with IHH’s clandestine attempt to subvert the status quo order directed by the SC on December 14, 2018, and September 22 with respect to the conduct of forensic audit and the pending proceedings before the HC by purportedly consulting regulatory authorities, including Sebi, on the proposed FHL-IHH transaction. It has reiterated that the FHL-IHH transaction was currently sub-judice before the HC where FHL is also a party, its solicitors, P&A Law Offices, have said in the letter.
“We further state that any such attempt by FHL and/or IHH to proceed with the FHH-IHH transaction would be in direct contravention of the HC and SC orders,” the letter sent by the law firm has stated. Daiichi Sankyo is pursuing the enforcement of Rs 3,500-crore arbitration award against the Singh brothers pronounced by a Singapore tribunal for concealing information when they sold Ranbaxy Laboratories to it for $4.6 billion in 2008. The apex court had in 2018 put on hold the sale of Fortis Healthcare to IHH on a contempt plea filed by the Japanese drugmaker against the Singh brothers.