Neutral TATA Motors Ltd for the Target Rs.631 by Motilal Oswal Financial Services Ltd
India CV shines, JLR and India PVs face severe headwinds
Demand outlook remains weak across its business segments
* Tata Motors’ consol EBITDA margin of 9.2% in 1QFY26 came in below our estimate of 10.9% due to weaker-than-expected performance at JLR and India PVs. Consol PBT was ahead of estimate due to lower depreciation and lower interest expenses.
* JLR is facing multiple headwinds, which include: 1) tariff-led uncertainty for exports to the US; 2) demand weakness in key regions like Europe and China; and 3) rising VME, warranty and emission costs. Given these factors, management has refrained from giving any guidance for FY26 and beyond. Given the above headwinds, we expect margin pressure to persist for JLR and have factored in 150bp margin decline over FY25-27E. Even in India, both CV and PV businesses are seeing moderation in demand. For lack of any triggers, we reiterate Neutral with June-27E SOTP-based TP of INR631.
India CV a bright spot in an otherwise weak performance
* Consolidated business: Tata Motors’ consol EBITDA margin at 9.2% was below our estimate of 10.9% due to weaker-than-expected performance at JLR and India PVs. Consol PBT was ahead of estimate due to lower depreciation and lower interest expenses.
* JLR: JLR EBIT margin declined 490bp YoY to a multi-quarter low of 4%. The sharp margin impact was a function of: 1) weak volumes, partially offset by an improved mix (impact of GBP82m), US tariff impact for two months (GBP254m), higher VME spends (up 90bp YoY to 4.1%, impact GBP38m), high warranty (up GBP144m) and adverse currency movement (GBP205m).
* TTMT CV business: Margins remained strong at 12.2% (flat QoQ and +60bp YoY), led by better ASP, higher exports and a higher share of non CV sales.
* TTMT PV business: PV EBITDA margins were down 180bp YoY at 4% due to weak demand, higher input costs, higher promotional spends (IPL) and higher discounting pressure. There have been periods where inventory was higher than the normal levels due to lower than expected demand, which in turn led to higher discounts.
* The overall India business (PV + CV) recorded free cash outflow of INR38b in 1Q after capex of INR22b.
* At a consolidated level, the net automotive debt has increased to INR135b from a net cash position of INR10b QoQ. Bulk of this net debt has increased at JLR and currently stands at INR106b.
Highlights from the management commentary
* JLR: Luxury demand globally has been weak given the tariff-led uncertainty in key regions. However, once the tariffs are set, management expects the uncertainty to go away, and hence, demand would reset to the new normal. In terms of region-wise demand, US demand continues to be strong and UK is stable. However, Europe remains uncertain and China has been weak due to the additional tax on luxury vehicles. Management has maintained its FY26 EBIT margin guidance at 5-7% with near nil FCF.
* India CVs: Management expects the CV industry to post single-digit volume growth in 2Q over a low base. Further, with normal monsoon and festive season build-up, TTMT expects CV demand to pick up in 2H. Hence, it maintains 5% volume growth guidance for the industry in FY26. Among segments, TTMT expects HCVs to post 3-5% growth, ILCVs a bit lower, SCVs to remain flat.
* India PVs: In India PVs, TTMT continues to expect low single-digit growth in PVs in FY26. Even to achieve this, demand will need to pick up in the festive season and 2H, given that the first four months have seen flat retail demand, with a 3% decline in the last two months. ICE margin is likely to remain under pressure in the near term. However, with a pick-up in demand, management expects ICE margins to revive in the medium term. TTMT remains committed to achieving double-digit EBITDA margin in the long run in PV business
Valuation and view:
JLR is facing multiple headwinds, which include: 1) tariff-led uncertainty for exports to the US; 2) demand weakness in key regions like Europe and China; and 3) rising VME, warranty and emission costs. Given these factors, management has refrained from giving any guidance for FY26 and beyond. Given the above headwinds, we expect margin pressure to persist for JLR and have factored in 150bp margin decline over FY25-27E. Even in India, both CV and PV businesses are seeing moderation in demand. For lack of any triggers, we reiterate Neutral with June-27E SOTP-based TP of INR631.
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