Investors are busy buying shares of Tata Motors and dumping Maruti on Tuesday, reacting to a Credit Suisse analysis. The brokerage firm has upgraded Tata Motors (up 5 percent intraday) to outperform and downgraded Maruti (down 2 percent) to neutral.
Credit Suisse believes Great Britain pound depreciation will drive a multi-year outperformance for Jaguar Land Rover in a way similar to what happened with the Japanese yen for the Japanese stocks. It is optimistic that 15 percent post-Brexit depreciation can lead to over 50 percent rise in EBITDA per car. It says JLR has other catalysts like product mix, platform consolidation and commodity) which can provide 300 basis points benefit but incentives will offset same. It has raised target price to Rs 720 from Rs 510 valuing JLR at Rs 500 per share.
"With better margins and growth profile, free cash flow would be higher, which will drive re-rating. JLR will report over 20 percent margins in Q3 which will drive EPS upgrades. Key risks include faster adoption of electric vehicles and a sharp slowdown in the US and Europe," it says in a note.
JLR's sales grew 11 percent increase in October retail sales of 46,325 units. Strong sales of the Land Rover Discovery Sport, Range Rover Evoque, Jaguar XF and the introduction of the Jaguar F-PACE, as well as strong year-on-year sales growth in China and Europe, JLR said in a statement.
Meanwhile, Credit Suisse has turned negative after maintaining it as top pick since April 2013. It reasons that as most positives seem to have priced in, Maruti is most expensive auto stock globally. It says while auto original equipment manufacturers (OEMs) have de-rated by 20 percent in last few years, Maruti has re-rated by 50 percent.
The brokerage feels further upgrades look unlikely given that 18-20 percent volume growth in FY18 is already baked in. However, it has raised FY17 earnings per share (EPS) by 8 percent but broadly maintains FY18/FY19 EPS and target price of Rs 6000.
"With the start of the Gujarat plant, there could be a 100 basis points impact on margins. Post Ignis, the pipeline of new launches looks a bit dry. With the 28 percent rate slab, it seems that there will not be much benefit from GST as compared to a 5-6 percent price cut envisaged earlier," Credit Suisse adds.
The brokerage firm suggests shifting investors to Tata Motors from Maruti.
At 11:57 hrs Tata Motors was quoting at Rs 534.55, up Rs 27.25, or 5.37 percent and Maruti Suzuki India was quoting at Rs 5,614.95, down Rs 105.75, or 1.85 percent on the BSE.Follow @NasrinzStory
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