Margin disappoints in both JLR and Standalone
* 4QFY14 performance was below estimate driven by disappointing margins in both the business. JLR’s margins declined 190bp QoQ (est to be flat), impacted by adverse product and regional mix, and unfavorable Fx. S/A margins at -6% (est -1.4%) due to year-end write-offs and dealer compensation on excise cut.
* Consol net sales grew 16.6% YoY to INR653b (est INR655b). EBITDA margins declined 30bp QoQ (up 140bp YoY) to 15.3% (est 15%). Interest cost increased by 67% QoQ to INR16.6b (est INR10.5b) primarily driven by JLR operations. Consol. adj. PAT grew 7.9% YoY (down 13.6% QoQ) to INR42.4b (est INR41.8b).
Management commentary on 4Q results and outlook
* JLR demand outlook healthy with RR and RR Sport having waitlist of 6 months. Capacity constraint though would restrict FY15 growth. Current capacity of 450,000 units to be scaled-up to 550,000 by 3QFY15 with ramp-up in 4QFY15.
* Major expansion projects viz China JV and engine plant on track to commence operations during 4QFY15. Jaguar XE (baby Jag) to be launched in 4QFY15 as well.
* Recovery signs visible in MHCVs; expects growth 2HFY15 onwards. New launches and industry recovery to drive PV business recovery.
Downgrade FY15E/16E EPS by 5.2/5.4% driven by JLR
* We downgrade our Consol. EPS by 5.2%/5.4% driven by downgrades in JLR partially offset by upgrade in S/A business on expectation of economic recovery.
* TTMT trades at 9.4x/6.8x FY15E/16E consolidated EPS. DVR trades at 5.7x/4.1x FY15E/16E consolidated EPS. Buy with TP of INR507 (FY16 SOTP-based) for ordinary shares and INR304 for DVR (~40% discount to TP for ordinary shares). \
Valuation & view
* We believe JLR is on the right strategic path and is investing in the right areas, resulting in its evolution to a much stronger and balanced player in the luxury vehicle market.
* Domestic business, though currently under pressure due to cyclical pressures in the economy, is expected to bounce back strongly along with economic recovery and favorable product lifecycle in the PV division.
* TTMT trades at 9.4x/6.8x FY15E/16E consolidated EPS. DVR trades at 5.7x/4.1x FY15E/16E consolidated EPS.
* Buy with TP of INR507 (FY16 SOTP-based) for ordinary shares and INR304 for DVR (~40% discount to TP for ordinary shares)
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