Jan 24, 2013 10:00 PM IST | Source:

JLR red flag: Has Tata Motors stock peaked out for now?

Tata Motors shares plunged over 9 percent on Thursday morning after the company warned that while third quarter revenue at its luxury Jaguar Land Rover unit will be higher than in previous quarters, margins are likely to be impacted due to several reasons including unfavourable forex rates and higher mix of low-margin Evoque SUV.

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Tata Motors' warning late on Wednesday that its luxury Jaguar Land Rover unit, which accounts for majority of its profits, would see flat earnings growth in the third quarter and margins will in fact decline due to unfavourable forex shifts and high share of low-margin Evoque SUV sent shock waves in the market.

Investors, so far driven by the JLR story, sensed things were not as rosy after all, and were quick to dump Tata Motors, sending the shares down 10 percent on Thursday morning.

Jaguar Land Rover sold over 3.50 lakh vehicles in 2012, up 30 percent year-on-year. Its wholesales in Oct-Dec rose to 94,828 units, while retail sales were also up at 88,658 units.

However, much of that sales growth has been on the back of the compact Evoque SUV, which has been a huge success, but has lower margins.

"We expect that for the quarter ended 31 Dec 2012, revenue will be higher than the previous two quarters reflecting the higher sales volumes. EBITDA is likely to be in the region of levels reported for the previous two quarters and EBITDA margin is likely to be slightly lower than in the previous two quarters, primarily reflecting less favorable exchange rates, the ongoing effect of a higher mix of Evoque sales and other factors," the India's largest commercial vehicle sale in an investor update late on Wednesday.

Brokerages domestic and foreign, many of whom were bullish on the stock, were quick to thumbs down the announcement and cut earnings estimates.

"Given that adverse currency movement and a weak product mix (led by Evoque) are the primary factors driving down margins, the pain may spill over to FY14. Benefits of ramp-up in Range Rover may be negated by adverse currency, increased incentives, and lower margins on Range Rover Sport before the introduction of the new model. We see EBITDA getting cut by 7-10% with a higher cut at the PAT level due to increased debt," IDFC said.

Goldman Sachs placed its estimates and target price on Tata Motors under review, pending more analysis. The stock could react negatively in the near-term following the announcement and increased capital expenditure, it said.

JLR has maintained capex spends of about 2 billion pounds for the current financial year. But in FY2014, JLR's capital spending is expected to go up to 2.75 billion pounds, which could mean negative cash flow next year.

Considering that cash flows in the domestic business are already poor, this negative cash flow news is a "major dampner" IDFC said.

The capital expenditure will be used for research and development and expenses on fixed assets like facilities, tools and equipment.

JLR does have a strong product pipeline and several new models will be launched in the next financial year.

The company has started production of the Jaguar F-Type, and it will go out to dealers by the second quarter of FY2014 and the new Range Rover Sport will also be available by middle of next fiscal, Tata Motors said in a conference call on Thursday. There will also be the Freelander replacement and the smaller Jaguar, which will compete with the BMW 3-Series, it added.

JLR hopes to have 5 lakh units per year production capacity by FY2014-end.

"While we were already building in a slight negative impact of currency in our estimates, we now understand that the mix and discounting was much more unfavorable and could lead to a 10 percent miss on our Q3 EBITDA estimate. However, as the old Range Rover is discontinued and the new one starts selling from the ongoing quarter, along with sales of higher ASP new model year products, margins should likely normalize in Q4 with the improved mix," said Emkay Global Financial Services.

It has cut its target price on Tata Motors to Rs 325 from Rs 350, but maintained an "accumulate" rating.

UBS, on the other hand, maintained investors should "sell" the stock and cut its FY13, FY14 earnings estimates by 6 percent.

Deutsche Bank too maintained a "sell" on Tata Motors. The investment bank had downgraded the stock last week, stating that valuations already reflected optimistic outcome on JLR's ambitious product plans. It also expects that competitive intensity in the luxury vehicle market would remain elevated as the other three rivals -- BMW, Mercedes Benz and Audi -- jostle for market leadership. It had also said that the scale-up in capex and R&D investments would hurt EBIT margins by around 90 bps.

In the domestic market, medium and heavy truck sales are expected to improve next financial year, as an expected cut in interest rates by RBI would revive sentiments among fleet operators, who have so far postponed new purchases given high interest rates and the overall slowdown in the economy. The passenger car business, however, is expected to remain under pressure.

Tata Motors shares were still down 6.5 percent at Rs 292.65 on NSE in afternoon trade. As of Wednesday's close, the stock had gained 14 percent since March-end, outperforming the broader auto index, which gained 11.7 percent over the same period.

Nachiket Kelkar

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