Brexit is a toss-up for JLR, impartial in case of a mushy one, or a win ought to the deal fall by. The latter implies tariff obstacles, which ought to spur JLR’s UK market share (~18%) attributable to native manufacturing arbitrage. On the opposite hand, JLR is comparatively immune in EU given extra capability versus gross sales and restricted imports from UK.
Potential GBP depreciation and lowering import content material (from EU) ought to be additionally useful. Beyond Brexit, JLR continues to remain on course whereas India (M&HCVs) is primed for a Super Recovery and a pointy PV turnaround. Hence, we’re elevating the goal EV/Ebitda for India to 13x, a reduction of ~15% to Ashok Leyland (AL), and revising the TP to Rs 215 (from Rs 197). Maintain ‘buy’.
Given friends Audi and Mercedes have nil manufacturing capability within the UK, a tough Brexit may strengthen JLR’s UK market share of ~18%. Key merchandise that might drive market share positive factors are Evoque, Discovery Sport, Velar and the Jaguar household. In EU (ex-UK), JLR’s greater manufacturing capability at ~250k models versus gross sales of ~100k models, capability so as to add extra fashions (for Jaguar and LR) with restricted investments and low (mid-single digit) imports from UK restrict the import tariff danger. Imports from EU into UK make up ~25% of gross sales, however ought to cut back over time. Assuming supportive (fiscal/liquidity) UK/EU authorities restricts demand disruption, greater working capital blockage is a manageable danger. A weakening GBP towards USD might present an extra tailwind.
The present share of alternative demand is at a multi-decadal low. This alongside with lead indicators (finance availability, resale costs, and so forth) suggests a powerful quantity cycle. As market chief, TML stays properly positioned to use this pattern reversal. The mixture of robust M&HCV volumes, enhancing efficiency in PVs and demerger of the PV business will assist a powerful turnaround.
In gentle of a complete administration reshuffle and steadfast execution (up to now), we stay constructive that each JLR and India will capitalise on product/cyclical tailwind and usher in structural and sustainable efficiencies (check with holistic enchancment). We additionally count on higher capex planning in order that its Ebitda stays greater than capex, regardless of demand surroundings.
While each companies make a powerful case for a re-rating, we’re re-rating the valuation of India business (in line with what we did for Ashok Leyland in Super Recovery), sustaining a ~15% low cost to AL’s valuation. Given its M&HCV management, we count on the India business to in the end commerce at a premium to its smaller peer as TML demonstrates the turnaround (much like that seen in AL throughout FY13–15). Maintain ‘buy/SO’ with an SoTP-based TP of Rs 215, valuing the India business at 13x EV/Ebitda and JLR at 6.5x EV/EBIT.