Dec 19, 2012 06:55 PM IST | Source:

Tata Motors stock defies weak local sales, insider selling

India's largest commercial vehicle maker Tata Motors hasn't had a particularly great year in the domestic market in 2012.

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Nachiket Kelkar

India's largest commercial vehicle maker Tata Motors hasn't had a particularly great year in the domestic market in 2012.

The overall economic slowdown, coupled with high interest rates led to sluggish demand for medium and heavy trucks across the industry, as fleet operators delayed new purchases. Its passenger car division too didn't have much to cheer about, as the overall slow sales growth meant the Indicas and Indigos were not flying off the shelf. The company is offering generous discounts to buyers of passenger vehicles in December.

Recently, Karl Slym, the new managing director of Tata Motors, wrote to departments asking to reduce spends and to rationalise travel, stay and even curtail production operations and certain spends on product development, according to a report in The Economic Times.

In the last five months, Tata Sons, Tata Industries and Tata Investment Corporation between them have sold around 75 lakh shares of Tata Motors. The last two developments would have most fund managers thinking twice before loading up on the stock.

And yet, investors appear to be more hopeful about the prospects of the company than the promoters and the management. The stock is quoting at a near eight-month high, with a near 50 percent rise since the last week of July.

Much of it has to do with the robust performance of Tata Motors’ British luxury car division Jaguar Land Rover. JLR contributes to as much as 90 percent of Tata Motors' earnings, and despite the global economic uncertainties, it has been gaining new ground in emerging markets like China, with its new Land Rover Evoque sports utility vehicle in particular finding many takers.

From January till November this year, JLR sales have risen 32 percent to 3.24 lakh units. Its Land Rover SUVs have particularly seen strong demand with sales rising 38 percent in the period, while Jaguar sales rose 7 percent.

"Since the start of the year, Jaguar Land Rover has seen strong sales performance across all of its major markets, with increases in China (73%), Asia Pacific (37%), the UK (20%), Europe (37%) and North America (12%)," the company said in a recent press statement.

In comparison, Tata Motors sales so far this financial year (April-Nov) are up just about 0.7 percent to 5.48 lakh units. Its passenger car sales declined 4.5 percent and only strong demand for its Ace range of LCVs is keeping some momentum going in commercial vehicles.

The market is expecting Tata Motors to clock sales of around 3.6-3.7 lakh vehicles in JLR. With sales for November turning out to be better than expected, analysts think the company will be able to satisfy the market.

This factor alone has led many broking firms to take a positive view on the stock.

"We retain our positive view on JLR and expect a 12 percent volume CAGR over FY2012-14 driven by Evoque and new product launches. Further, a favorable market and product-mix and stable commodity prices will help mitigate raw-material cost pressures," says Yaresh Kothari, analyst at Angel Broking, in a note to clients. Angle has a price target of Rs 319 on tata Motors.

BRICS Securities analysts Umesh Karne and Manashwi Banerjee have rated Tata Motors as their preferred pick with a price target of Rs 299. They believe, JLR’s performance will continue to drive Tata Motors stock as it contributes 75 percent of revenue and 90 percent of profit. 

Kotak Institutional Equities has a "buy" rating on the stock, with Hitesh Goel and Vinay Kumar saying JLR's volume trajectory inspires confidence. Motilal Oswal Securities' Jinesh Gandhi and Chirag Jain too maintain a "buy" on the stock, pointing to multiple margin levers for JLR over next 2-3 years.

There are a few contrarian voices though. UBS analyst Sonal Gupta feels the stock has already priced in the positives from JLR’s performance.

“We believe JLR remains fully valued at 4 times FY14 EV/EBITDA. While margins remain high, FCF (free cash flow) for the business is likely to remain weak given the high tax rate and high capex and R&D spend. We believe potential margin expansion in JLR margins due to introduction of New Range Rover is already priced in,” Gupta wrote in a note to clients. UBS has a sell rating on Tata Motors with a price target of Rs 250.

So what is driving the current upswing in Tata Motors shares? Brokers say heavy buying by momentum players like hedge funds has been a key factor in the steep rise in share price. The purchases are part of derivative and arbitrage strategies which involves buying the shares in the local market while simultaneous selling futures/ options/ADRs.

Tata Motors shares closed near 3 percent at Rs 306.85 on NSE on Wednesday.

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