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Sep 06, 2013, 02.14 PM IST | Source: CNBC-TV18

Tata Motors top bet, may revise its EPS upwards: StanChart

Six months back, there were concerns on the JLR volumes in China, but things turned around completely, says Amit Kasat, Standard Chartered Securities.

Tata Motors has been Standard Chartered Securities’ top pick in auto space for the past six months. The broking has outperformer rating on the stock.

Amit Kasat of Standard Chartered Securities told CNBC-TV18 that six months back, there were concerns on the JLR volumes in China, but things turned around completely. He further said that margin outlook for Tata Motors stands at 15 percent for the next three years and the broking firm may revise its EPS estimate upwards if JLR volumes continue to grow.

Kasat is also bullish on Maruti and foresees the company gaining 200-250 bps market share in FY14.

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Below is the edited transcript of Kasat’s interview with CNBC-TV18

Q: Tata Motors has been in the news recently with the JLR sales, what is your call, is it turning corner again? Would you have a buy on this stock?

A: We have outperformer rating on the stock and it is one of our top pick for the last six months. Six months back there were concerns on the JLR volumes mostly in China, but things have turned around completely. The biggest regions where JLR has presence are US, Europe, UK and China. The forecast for volume may get revised upwards and that is getting factored into the stock price today.

Q: What is your target price on Tata Motors and what makes you incrementally positive if you could highlight the margin expectations on the same?

A: The margin outlook for Tata Motors stands at 15 percent for the next three years. Land Rover business is definitely a very healthy margin portfolio for the company. We also did a detailed work saying that JLR business itself is going to be a positive at the EBITDA level and that is one reason why we are very positive.

Secondly, FY14 and FY15 will be a crucial year for the company because there is a huge product pipeline which they have already planned. Hence we have to see the execution of all the products in the different markets which will give them the incremental volumes across the geographies.

Thirdly, their standalone business will always remain option value for investors. We are fairly confident to say that FY15 where our EPS forecast is at the top end of the forecast on the street will see a upside revision over a period of time if the JLR volume continues to surprise the street going forward.

Q: Your other top pick in auto is Maruti Suzuki, what explains that and what is the price target here?

A: For Maruti we have been looking at the market share in the passenger vehicle industry. In our reports we have highlighted that in a current macro condition, market share will be a crucial parameter to see how companies are going to perform.

We do believe that in FY14 Maruti will gain close to around 200-250 bps in terms of the market share. There is a concern on margin profile post rupee run up, so we believe that the profile of an operating margin will be close to around 10-10.5 percent, which is 0-3 percent of volume growth which we are expecting for Maruti itself.

Q: What is your expectation on the domestic business for Tata Motors and how much worse do you think that it could possibly get and eventually do you think that may be brokerages will start turning from a buy rating to a more negative stance simply because of a worsening trend within the domestic space itself for Tata Motors?

A: Its domestic businesses both passenger vehicle and commercial vehicle, constitute close to around 20-22 percent of revenue and it doesn’t contribute anything to the bottom-line today. Definitely FY15 will again be a struggle for both these segments, but their losses on a quarterly basis will get trimmed. Market has already factored close to around Rs 50-60 negative valuation for its domestic business.

Q: What about the auto ancillary space, do you have any picks from there?

A: Exide Industries and Amara Raja Batteries are our top picks. Our price target on Amara Raja is Rs 340.

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