JLR drives TaMo’s FY24, but slow lane ahead?

JLR's earnings before interest and tax (Ebit) margin surged to 8.5% in FY24 from a mere 2.4% the previous year. This is no mean feat and was aided by a combination of better scale, input material cost savings and a favourable product mix of Range Rover and Defender brands.

Moreover, JLR generated ₹24,000 crore in free cash flow (FCF) for FY24, significantly reducing TaMo’s net automotive debt to ₹16,000 crore as of end of March, down from ₹43,700 crore the previous year. 

Tata Motors is on course to become a net debt-zero company in FY25. Here, JLR’s cash generation should help the management in fulfilling its promise even as FCF is expected to be lower year-on-year in FY25.

“With volume growth and margin stabilizing, capex rising and no incremental support from working capital, we believe quantum of FCF may have peaked out in FY24 for JLR at GBP 2.3 billion," said a report by ICICI Securities.

Still, the reduction in debt may ease concerns about TaMo's valuation, as the company's enterprise value (EV)—calculated as market capitalization plus net debt—would decrease. Currently, at more than 7% FCF-to-market capitalization, valuations appear reasonable. This assessment is based on the auto business FCF of ₹27,000 crore and a market capitalization of nearly ₹3.53 trillion. This scenario could also enable the company to increase future dividend payouts.

But valuations aside, it is likely that investors are waiting for the split of the passenger vehicle (PV) and commercial vehicle (CV) businesses to be completed before taking a plunge. 

Given that the split has been announced, one way to look at TaMo’s financials is to segregate it into PVs and CVs. 

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As far as PV business is concerned, Indian FY24 PV sales at ₹52,400 crore appear very small compared to that of JLR at ₹3 trillion. Hence, it makes sense to have greater emphasis on results of JLR, as it also accounts for a large share of TaMo’s profits.

Sure, the CV business did well in FY24, but the main driving force remains the PV business. The CV business topline stood at ₹78,800 crore in FY24 and benefited from 16% higher average selling price that helped in offsetting the volume drop of 4%.

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As investors look ahead to FY25, they anticipate a less eventful year, especially after the stock’s near 80% appreciation over the past year. The medium-term outlook isn’t as promising. For one, the management expects JLR’s Ebit margin to stay flat in FY25. Higher marketing expenses are one reason expected to weigh on margin this year.

Additionally, JLR’s volume growth is expected to slow down sharply after a high base. 

Analysts from IIFL Securities are forecasting volume growth to taper down from 25% in FY24 to 4% in FY25/FY26. The brokerage’s reasons for slower volume growth include a rise in dealer inventory, which leaves little scope for further re-stocking (5% of JLR’s wholesales came from dealer re-stocking in FY24); and that the new order-flow run-rate at 80-85% of retails, will need sharp ramp-up in FY25.

TaMo’s India businesses are also expected to face growth challenges in FY25.

These factors, along with the below-expected March quarter (Q4FY24) results, contributed to TaMo’s shares dropping over 8% on Monday, making them the top loser among the Nifty 50 stocks.

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