TaMo Q3 gives clear signs of earnings recovery | Economic Times

ET Intelligence Group: Tata Motors’ operating performance in the December quarter may add more conviction to the likelihood of better earnings — and a leaner balance sheet. Earnings upgrade and superior valuation of the local business after the December quarter earnings may sustain the stock’s outperformance.Tough measures by India's largest vehicle maker to contain costs and improve efficiencies have boosted the financials of the local operations and of Jaguar Land Rover (JLR), which contributes more than three-fourths to Tata Motors’ revenues.So, operating profit margins of JLR improved 560 basis points to 15.8 per cent in the December quarter. There are some one-off events, such as reversal of emission fines and superior product mix (higher share of Land Rover), but the trajectory of base operating margins has been consistently improving.Variable marketing and warranty expenses, which dented JLR’s margins for quite a long time, are shrinking. The Street is still apprehensive about the sustainability of decline in the VWE and warranty expenses at the current level. But if JLR can sustain the decline, operating profit margins (Ebitda) might further climb.Moderation in capex intensity has been supporting JLR’s effort to improve its cash flow and liquidity. Cash on JLR’s books improved 25 per cent on a sequential basis to 4.5 billion (Rs 45,000 crore) and net debt slipped to 2.6 billion in December 2020 compared with 3.3 billion in the previous quarter.Volumes are expected to rise 20-22 per cent in the next fiscal year and are likely to close at FY20 level following encouraging response to Defender and a couple of refresh pipelines. The market currently ascribes EV/EBITDA multiple of 2-2.3 times to JLR and superior multiples will depend upon its share in the global premium market.Back home, the domestic business is showing strong recovery and operating profit margins rose by 570 basis points to 6.8 per cent, the highest in the last seven quarters. The commercial vehicle division with a volume decline of 8 per cent has revenue growth of 21 per cent on YoY basis and passenger vehicle volume rose 86 per cent. 80618375Ebitda margins of commercial vehicles rose 580 basis points to 8 per cent and the PV business margins improved by 780 basis points to 3.8 per cent. Absolute Ebitda of the passenger division is the highest in the last decade. Even on the debt side, the local operation automotive gross debt dropped to Rs 25,413 crore in December 2020 from Rs 31,099 crore in the previous quarter.Analysts have started ascribing a valuation of Rs 20-24 per share to the domestic PV business taking the tally of the domestic business to Rs 150-160 per share, which is nearly equivalent to the value ascribed to JLR.