'Next 6-8 months crucial for TaMo to turn around local biz'

Below is the transcript of the interview with Menaka Doshi, Senthil Chengalvarayan & Sonia Shenoy on CNBC-TV18

Sonia: 4.2 percent growth in the Jaguar Land Rover (JLR) revenues, Rs 933 million EBITDA, how would you react to that number?

Vass: The sales are more or less in line but the margins is definitely at least for is a bit on the margins. We had expected a decline of around 150 -200 basis points on quarter-on-quarter basis but this is a positive. However there are impacts on the foreign exchange (FOREX) and in terms of unrealised hedges that have brought down the profits before tax to lower than expectations and overall lower than what on a profit level as well for that JLR portion. The FX has played a major impact in the JLR profitability. The domestic business losses have widened beyond expectations and that is the one that has dragged over all consolidated profitability to that level which we are seeing. That is turning out to be an increased to worry now.

Sonia: Considering that the stock is sitting at around Rs 530 it’s been a little sideways since the month of September so if you look at the narrow band for Tata Motors. How would you approach the stock based on these numbers?

Vass: You can see JLR continuing to do well on the operating front’s even if their FX impacts getting normalise you can see profitability going much higher from what street was anticipating so that’s the positive. However for the over all stock perspective the domestic business needs to pick up now considering that at least in this commercial vehicle space you are seeing the other player doing slowly much better. So they need to probably show their performance on the operating front.

On the passenger car business the market is going to give them around these 6-8 months to see how their new products Zest and Bolt come out in terms of volumes. This is an important phase for the domestic passenger car business and I will be keenly awaited and from a stock perspective JLR continues to help the stock that should be obviously the valuations as major portion driven by JLR. However in 6-8 months time we need to relook where the domestic business is heading.

Menaka: Everybody is talking right now about improved performance on JLR front but unfortunately the depressed numbers on the domestic front are going to neutralise that improvement. Would you say therefore that you view on this stock stays the same hereon?

Jain: At present our fair value on the stock is Rs 550 so remains same but definite there is an upside and because the first half performance as been slightly better than what we were expecting. At present Tata Motors is all about JLR though the domestic business is struggling, the passenger vehicle is struggling so what now we are seeing is the JLR margins which last time was around 20 percent earnings before interest, taxes, depreciation and amortization (EBITDA) margins that was sustainable.

Eventually over the next couple of quarters is going to moderate downwards because as they are going to launch new models those will be opening up new segments and those will be slightly lower margins for us but will increase the volume. While Tata Motors becomes the complete luxury car maker you are going to expect a more normalize EBITDA margins but that will be compensated as we see recovery in the commercial vehicles (CV) in India.

Menaka: Would your expectations on the domestic business now get pushed out by at least a couple of quarter not just on a passenger car front but even on the CV front given the kind of numbers we are seeing today prima facie?

Jain: Passenger vehicle at present is very small but we are actually enthused by Zest performance and we have actually tried and tested and commented last time that this is something very different that what they have done but given a long delay in model introduction the passenger vehicle is going to take a long time to come back in favor. So, commercial is the focus and given this slower demand on the ground, slower pick up in the demand commercial vehicles pick up is going to take more time. We are still one or two quarters away to actually talk really more about commercial vehicles and their next quarter and the fourth quarter more so will be more about the product launches specially the Jaguar XE which is targeted towards the Asian market and that should be the real flavor.

Sonia: What did you make of the numbers this time and how would you approach the stock on Monday?

Jhaveri: JLR margins have been quite upbeat. So, JLR continues to support Tata Motors. Standalone basis definitely it is a weaker set of numbers but most of the valuation now comes from JLR. So, overall looks positive from a JLR perspective.

Sonia: What is your call on stock now in terms of a target price? Would you scale up your JLR estimates for the end of the year based on these numbers?

Jhaveri: Yes because they are doing a volume growth of closer to 13 percent. Our estimate is around 14 percent so not much change in volumes but definitely in terms of margins we are at 17.8 percent for the full year and for the first half they have done around closer to 20 percent. So, even if they go down there will be some margin expansion. So, my target is around Rs 580 right now but Rs 580 is buy recommendation on the stock, so, we continue to like this name.