IIFL upgrades Tata Motors to buy;target price at Rs 425

Without doubt Jaguar Land Rover's performance helped Tata Motors post better than expected Q3 numbers said Prayesh Jain, AVP - Research at IIFL in an interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. The house has upgraded the stock to buy with a target price of Rs 425 and has revised the earnings estimates by around 6-8 percent for JLR operations. Jain expects a strong performance from the stock in the next six to eight months.JLR's standout performance was mainly because of the product mix and a higher contribution from emerging markets, he said. The momentum too is likely to sustain for JLR in the coming 2-3 years on back of sustained volume growth of 15-20 percent  said Jain.  Tata Motors posted stellar Q3 numbers driven by an exceptional income in the local standalone business and a robust performance at its British subsidiary Jaguar Land Rover.Below is the interview of Prayesh Jain, AVP - Research at IIFL with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: What stood out for you in the standout performance from Tata Motors and can you see this performance getting repeated?A: I think the main standout performance was Jaguar-LandRover (JLR) again. It has been consecutively 4-6 quarters where JLR has been giving outstanding performance and for us the margins were a big surprise. We were expecting the operating margins in the order of around 16 percent for JLR, they delivered 17.9 percent. This is mainly on the back of sustainable product mix that the company is doing. In spite of currency not being favourable in this quarter the company delivered sequentially flat margins, this was mainly on back of the better product mix whereby higher contribution from the new Range Rover and the new Range Rover Sport helped them report these kind of margins.Even in terms of geography, I think higher contribution from emerging markets is helping them. The momentum is likely to sustain, even in terms of volume growth, we expect - there are line up of around 30 new models or upgrades together over the next five years and auto industry as we know is that every new model or an upgrade is a good driving force. So in the next two-three years, the volume growth of 15-20 percent is sustainable for JLR and it is getting into newer markets now and emerging markets are starting contributing higher. So the margins are also likely to sustain, apart from that they have levers in the form of - they will be sourcing from low cost countries like China and India plus they are setting up capacities elsewhere. So there are a lot of levers that can help it sustain the performance over the next couple of years.Sonia: What do you do with the stock now because it faced a bit of a hurdle at that Rs 400 mark in the month of November and came off from there but this morning there are some huge target prices of Rs 470-480 etc, have you increased your target price and have you upped your earnings estimates for Tata Motors?A: We have definitely done both of them. In fact we had a market performer rating on the stock until the last quarter, we are upgrading to buy and we are revising the target price from Rs 400 to Rs 425 and earnings estimates have been revised by around 6-8 percent for JLR operations.Latha: How much more do you think the stock can react to this, what is your price target and how quickly can it be attained?A: The stock can definitely achieve a lot of momentum and has good valuation upsides. The stock is trading at around 6.4 times FY16 P/E and EV/EBITDA of close to around 3-3.5 times. It is substantially cheaper as compared to the domestic peers. Even if you compare it with the global peers, it is relatively fairly valued but the earnings upsides for JLR are much better. So I think the stock is set to perform strongly over the next six-eight months.