2QFY20 results of Tata Motors, Jubilant Life Sciences and Shriram City Union Finance

TATA MOTORS: JLR recovery visible,
India bottoming out; upgrading to Buy

(TTMT IN, Mkt Cap USD5.6b, CMP INR127, TP INR185, 46% Upside, Upgrade to Buy)

–      Consol. revenue declined ~9% YoY to ~INR654.3b (est. of ~INR632.2b) in 2QFY20. EBITDA grew ~8% YoY to ~INR71.6b (est. of ~INR44.9b). Adj. net loss was at ~INR1.9b (est. of ~INR14.8b) v/s ~INR5.6b in 2QFY19. For 1HFY20, revenue/EBITDA fell 8.5%/13% YoY; net loss was at ~INR37.9b.

–      JLR – mix, low VME/warranty boost margins: JLR’s performance was strong, with the EBITDA margin at 13.8% (est. of 7.7%) – one of the highest in four years. This reflects (a) a recovery in China and resilient US/EU, (b) a better mix, (c) Project Charge delivery, (d) lower D&A and (e) favorable FX. PBT before EO stood at GBP166m (est. of GBP77m loss). FCF was negative at GBP64m (v/s GBP623m in 2QFY19).

–      S/A – operating deleverage, write-off in PV business hurt margins: India business was impacted by inventory reduction, resulting in retails coming in higher by ~27k than wholesales in 2Q. India business disappointed with an EBITDA loss of ~INR1.7b (est. of +INR2.2b) due to write-off of ~INR2.33b in PV and operating deleverage. Adj. net loss was at ~INR13.4b (est. of INR6b). CV/PV inventory was comfortable at 35/48 days.

–      Equity issuance of INR64.9b at ~INR150/sh via preferential allotment to Tata Sons: TTMT would issue 201.6m ordinary shares (amounting to INR30.24b) and ~231.3m warrants convertible at ~INR150/sh (amounting to INR34.7b). Post allotment of ordinary shares/warrants, the promoter stake would rise to 39.5%/43.7% from 35.3%, leading to a dilution of 6.8%. Proceeds will be used to repay debt (net auto debt: ~INR500b).

–      Concall highlights: (a) China’s KPIs continuing improving, which is translating into improved sales (JLR’s retails in China grew 24.3% 2QFY20 v/s premium segment being flat YoY). (b) Cost-cutting target of GBP0.85b maintained for FY20 (implies a 2H ask-rate of GBP500m) through savings in material (GBP300m), men (GBP250m) and overheads (GBP300m). (c) Given the impending Brexit, it is targeting to increase FX hedges by 15pp of exposure for three years (to ~50%), four years (to ~30%) and five years (to ~25%). (d) India’s CV business is showing initial green shoots in demand drivers in the form of freight availability post monsoon, slight firming of freight rates and inquiries from fleet operators ahead of BS6 transition.

–      Upgrading to Buy – JLR recovery visible, India worst is behind us: Over the last three years, JLR had suffered from an adverse product (growth led by Jaguar) and market mix (decline in China contribution) and also an increase in capex, resulting in negative FCFF over FY18-20. JLR has been focused on cutting capex and cost, benefits of which have started to reflect now. Finally, we are seeing mix normalizing with a recovery in LR and China. On the other hand, India business appears to have bottomed out in 2QFY20, though a full-blown recovery may be a few quarters away. Hence, we upgrade our EPS estimate for FY21 by ~8% and also our rating from Neutral to Buy with a revised TP of ~INR185 (Sep’21 SOTP-based) given the favorable risk-reward.

JUBILANT LIFE SCIENCES: In-line earnings; Demerger of Pharma/LSI approved; 2HFY20 outlook better for LSI on stable pricing

(JUBILANT IN, Mkt Cap USD1.3b, CMP INR561, TP INR650, 16% Upside, Buy)

–       Pharma segment growth offsets decline in LSI segment: 2QFY20 sales at INR22.6b (in-line) were flat YoY. The 9% YoY growth in pharmaceuticals (64% of sales) was offset by 15% YoY decline in Life Science Ingredients (LSI) (33% of sales). Particularly, Generics segment in Pharma and Specialty Intermediates in LSI grew 20%/32% YoY to INR3b/INR2.6b.

–       Higher opex reduces benefit of superior product mix: Gross margin improved 450bp YoY (~50bp QoQ) to 66% due to superior product mix. EBITDA margin grew at lower rate of 90bp YoY to 20.7% (in-line) due to higher employee cost (+130bp YoY as % of sales) and other expense (+170bp YoY as % of sales). Accordingly, EBITDA grew 4% to INR4.7b (v/s est: INR4.6b). PBT was stable YoY at INR3b. However, PAT grew at a higher rate of 19% YoY to INR2.5b (v/s est: INR2.2b) due to lower tax outgo. For 1HFY20, sales/EBITDA/PAT came in at INR44b/INR9b/INR4.4b, up 2%/3%/8% YoY.

–       Board approves demerger of Pharma/LSI business: Company’s LSI business with mirror shareholding as that of JLS would be listed on the BSE/NSE. Process would take about nine months. The Pharma entity had sales/EBITDA of INR56b/INR14b and LSI had sales/EBITDA of INR36b/INR4.2b for FY19. Net debt for the Pharma/LSI business is ~INR21b/INR10b.

–       Key Concall highlights: (a) Sartans-related issues resolved and supplies have resumed. (b) Remediation cost and non-supply penalty will  continue in 3QFY20. (c) 2HFY20 should be better on stable Acetic acid pricing.

–       Valuation and view: We raise EPS estimates by 2%/3% for FY20/FY21 to factor in better outlook for the API business and gradual improvement in profitability of LSI business. We roll our earnings and continue to value JLS on SOTP basis (8x EV/EBITDA for pharma and 4x EV/EBITDA for LSI) to arrive at a price target of INR650. We remain positive on JLS on the back of robust profitability in the Pharma segment and gradual revival in the LSI segment. Maintain Buy.

SHRIRAM CITY UNION FINANCE: Disbursements down; Asset quality healthy

(SCUF IN, Mkt Cap USD1.2b, CMP INR1325, TP INR1600, 21% Upside, Buy)

–      Core PBT of INR3.8b was largely flat QoQ/YoY and in line with our estimates. However, given the lower-than-expected tax rates, PAT beat our estimate by 6% (+19% YoY to INR3.0b).

–      2QFY20 was one of the toughest quarters since the liquidity crisis. The quarter was characterized by slowdown in MSME disbursements (down 44% YoY), leading to 19% YoY decline in total disbursements to INR52b. The company is taking a cautious stance on MSME disbursements.

–      Thus, AUM growth declined 2% QoQ (flat YoY) to INR297b. While management expects 10% YoY AUM growth in FY20, our estimate is lower at 2% YoY.

–      Yield on AUM declined 100 bp YoY to 19.1%, while cost of funds increased by a similar quantum YoY to 9.9%. SCUF cut down its CP exposure (down QoQ from INR11b to ~INR6b) and increased its borrowings from retail sources and long-term borrowings. The company also securitized INR14b+ during the quarter via PTCs (INR9.3b) and direct assignments (INR5b).

–      In 1HFY20, disbursements have declined 10% YoY to INR115b, while core PBT has grown 5% to INR7.6b. RoA/RoE for 1HFY20 is 3.77%/16.5%.

–      GS3 ratio declined 20bp QoQ to 8.7%. PCR (on stage 3 loans) was stable QoQ at 43%. Quarterly write-offs increased to INR2b from the run-rate trend of the past few quarters at ~INR1.6-1.7b.

–      Valuation and view: SCUF’s business model in MSME and 2W finance has immense scalability; however, near-term outlook remains challenging due to liquidity constraints. The company has been scaling back in both MSME and 2W lending. As a result, AUM growth is likely to be in single-digits for FY20/FY21. We cut our FY20/FY21 EPS estimates by ~5%. Maintain Buy with a TP of INR1,600 (1.2x Sep’FY21 BVPS).