Book profits in Tata Motors on every rally: StanChart Sec

Auto major Tata Motors first quarter consolidated net profit rose 12% year-on-year at Rs 2,245 crore. However, it missed analysts' estimates on the back of foreign exchange loss and slow sales in the domestic market.

Its British luxury Jaguar Land Rover (JLR) unit reported consolidated revenue of Rs 43,324 crore in April-June, up 30% from a year ago. Amit Kasat of Standard Chartered Securities told CNBC-TV18 that JLR's margin at 14.5% is in line with expectations. Standard Chartered Securities downgraded Tata Motors post fourth quarter due to concerns on JLR's volume growth. Kasat believes that concern still remains because market’s expectations from JLR in terms of volume growth are high. "A monthly run rate of say 27,000 or 28000 units is still doable, but the market's expectation is much higher, if it falters then that maybe a disappointment," he elaborated. He expects JLR’s volume to grow in the range of 10-12% in FY13. Meanwhile, broking fim Credit Suisse has also downgraded Tata Motors to "underperform" from "neutral" after cutting its volumes forecast and increasing its tax rate assumption for JLR. Below is the edited transcript of Kasat’s interview with CNBC-TV18. Q: The JLR margins were held at 14.5% where there any disappointments for you which the market might be reacting to? A: Definitely, margins at 14.5% were better than what market was looking out for. For me, the margins came in line so there was no disappointment on the margin front from the JLR. Q: Any volume related issues that you have given the kind of macro numbers that you are seeing? A: Definitely yes, that’s the only reason that we have downgraded the stock after the fourth quarter. The macro issues are weighing very heavily on the automobile sector globally. JLR is a major player in the global market. There can be a risk if they are not able to deliver the kind of volumes on a month on month basis for the next nine-10 months the market is expecting.  A monthly run rate of say 27,000 or 28000 units is still doable, but the market’s expectation is much higher, if it falters then that maybe a disappointment. Q: For the full year what is a realistic number to be working with you think for JLR? A: A 10-12% growth on what they have done last year. They did close to around 3.13 lakh units last year, so basically 10-12% growth is a realistic scenario. _PAGEBREAK_ Q: What about the domestic business s maybe it was a bit better than what the street was expecting this time around but do you expect those numbers to worsen during the year? A: Definitely, domestic business as a whole is under pressure. Commercial vehicle portfolio, two parts to it MNSV segment is struggling in terms of the volume growth and LCV is still doing better. My belief is that LCV growth rate may slowdown in the second-third quarter, which has not happened in the first quarter. So, there will be some pressure in terms of the volume which will get reflected in the margins going forward. Passenger vehicle business is not making EBITDA for the company, which is a drag currently on the standalone. So, there is a pressure going forward in the next two to three quarters. Q: What's the call on the stock now from this level of Rs 233? A: If the stock rallies from here definitely book a profit. We have downgraded the stock to in line with a price target of Rs 280 for the next 12 months. The problem here is how you value JLR. My belief is that the JLR gets fairly valued at 3.5-4 times EBITDA multiple.
 
If some positive changes happen on the macro side definitely that multiple will get enhanced. That is a biggest delta in the overall valuation perspective. But from the current scenario, if the stock rallies one should book profits on the stock. Q: Did you upgrade your numbers on earnings numbers on M&M post the results? A: I have. On the revenue front the company has really done well, almost Rs 10 million. There was a gap between what I was expecting and what company has reported so 9-10% there was upgrade in the earnings on the standalone basis. Q: Where are your earnings and price target numbers on M&M now? A: Earnings on a standalone are close to around Rs 45 a share. My price target is Rs 785 for 12 months. For M&M the trend has been of margin pressure. For the last four quarters we are seeing margin pressure on tractors and automotive businesses. The decline in the automotive business margin will get stablised at 8.5-9%, but still there will be a pressure on the tractor business where the margins is close upto around 15% currently. That may come down to 13-14% in the subsequent quarters mainly because the industry outlook is very bad. The company themselves in the conference call had said that the industry growth which they are looking out for for FY13 is close to 0-2%.