Nov 17, 2012 02:19 PM IST | Source:

Buy Tata Motors; target of Rs 370: FinQuest Securities

FinQuest Securities is bullish on Tata Motors and has recommended buy rating on the stock with a target of Rs370 in its November 09, 2012 research report.

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FinQuest Securities is bullish on Tata Motors and has recommended buy rating on the stock with a target of Rs370 in its November 09, 2012 research report.

“Tata Motors Limited (TML) came out with Q2FY13 results which were below ours as well as consensus estimates. PAT came in at Rs21.1 bn, down 9% Y-o-Y, 21% sequentially, 30% below ours and 11% below consensus estimates. One of the main reasons for this earning miss was the drag from the India business whose EBITDA at Rs7.3 bn was down 21% Y-o-Y as EBITDA margins contracted to 5.2% from 6.7% reported last year. However the continued resilience in JLR margins saved the day for TML. JLR's EBITDA at GBP 486 mn was up 16% Y-o-Y and came in at 14.8% of total revenue. EBITDA margins should have contracted Q-o-Q in Q2FY13 due to adverse product mix (on the back of a major product upgrade, of the flagship Range Rover) but actually it expanded by 30 bps to 14.8%.”

“JLR's performance was expected to be weak in Q2FY13 mainly on the back of a major product upgrade, of its flagship Range Rover. Net revenue was up 12.8% for Q2 FY13 Y-o-Y driven by continued strength from China. The major surprise however was the EBITDA margin at 14.8%, up by 30 bps Q-o-Q, which was positively impacted by improved volumes, favorable geographic mix, exchange rate (avg. £/$ rate 1.59 in Q2 FY13 vs. 1.64 in Q2FY12), lower commodity costs, offset partially by adverse product mix (reflecting higher Evoque volumes and lower Range Rover volumes due to model changeover) and increased employee costs. Even though TML scored some brownie points by increasing the market share in the passenger car/CV business, the incremental share came at a cost. Aggressive promotions coupled with lower utilization of its assets pulled down EBITDA margins. While standalone sales declined 3.8% Y-o-Y to Rs 124.8bn, EBIDTA declined by a massive 25.1% Y-o-Y to Rs 6.54bn. Overall domestic volumes grew by 8% Y-o-Y to 206,412 units with the growth predominantly driven by passenger cars (up 16% Y-o-Y), UVs(up 36% Y-o-Y), MPV(34% Y-o-Y) and LCVs (up 34% Y-o-Y) but were pulled down by MHCVs(down 16% Y-o-Y). This resulted in realizations declining by 10% Y-o-Y to ~Rs561k (higher discounting in MHCVs and PVs and weaker mix with lower share of MHCVs). India business margin was weak led by continued cost pressures, heavy discounting in cars and MHCVs, despite mix towards higher margin LCVs.”

“Outlook in India remains challenging with the company operating at utilizations in the range of 50-70% in its passenger car/ CV business. Even though the company gained some share both in the CV and passenger car business, it came at the cost of heavy discounting especially in trucks. JLR’s product cycle is expected to pick up momentum in H2 more so in Q4 as production is ramped up of the new Range Rover (waiting periods in some markets stands at more than 6 months). There has also been a strong response for its F-Type sportscar whose pre-launch order book stands at more than 2,000. The new variants of Jaguar cars like the AWD and lower powered variants which are targeted at US and China should start selling in Jan'13 while the sports brake variant of the Jaguar XF (Dec ‘12 launch) should add good volumes in Europe. Evoque which has grown from strength to strength should continue do well while the new Range Rover Sport expected to arrive by the middle of 2013 should gain from the expected success of the new Range Rover. Some of this growth should translate into meaningful margin expansion from Q4FY13 onwards.”

“Even though the sales and EBITDA margins are expected to be subdued in the next quarter as well, growth should pick-up from Q4FY13. Factoring in the robust performance of JLR we re-rate the valuation multiple of JLR a notch higher from our earlier 3.5x FY13E EV/EBITDA to 4x for FY14E while we value the parent at a P/E 9x FY14E earnings. We reiterate our Buy rating on TML, while we revise our earlier target price from Rs 277 (FY13 end) to Rs 370 (by the end of FY14) upwards on the back of expected traction from high margin Range rover coupled with increased volumes driven by variants/refreshes of the current model line-up. We have modeled for FY13E/FY14E earnings of Rs 37.4 and Rs 46.2 respectively. TML continues to trade at 6.1x FY14E earnings which is relatively cheap compared to its domestic and global peers. Even though there might be some pain in the next quarter as well TML could offer significant upside if there we factor margin expansion arising out of higher ASPs of new models from Q4FY13 onwards,” says FinQuest Securities research report.

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