Buy Tata Motors; target Rs 362: FinQuest Securities
FinQuest Securities is bullish on Tata Motors and has recommended buy rating on the stock with a target price of Rs 362 in its February 27, 2013 research report.
February 28, 2013 / 08:18 IST
FinQuest Securities is bullish on Tata Motors and has recommended buy rating on the stock with a target price of Rs 362 in its February 27, 2013 research report.
"Tata Motors, prior to Q3FY13 results JLR lowered its margin guidance which created a big sell off in Tata Motors Limited's (TML) stock. However, JLR margins at 14% weren't as bad as anticipated. On the contrary we should panic from the margins that standalone business reported in Q3FY13 which posted a loss of Rs 4.58bn. TML reported consolidated revenue of Rs 460.8bn, up 2% Y-o-Y for Q3FY13, out of which ~73% came in from JLR. JLR's adverse product mix coupled with a stellar show in Q3FY12 made Q3FY13 look mediocre. However the margins were more or less in-line with what JLR has been reporting over the last few quarters. Sluggish volumes in domestic market both in CVs as well as passenger cars resulted in lower operating leverage while higher other expenses resulted in overall EBITDA declining 17% Y-o-Y. PAT was down 52% Y-o-Y to Rs 16.3bn on account of higher taxes. If it wasn't for JLR's margin of 14% the contraction in consolidated margins would have been higher as standalone EBITDA margins coming at a paltry 1.4%.Richer product-mix should aid JLR going ahead: Higher mix of lower ASP models like the Evoque and Freelander and ramp down of the old Ranger Rover to make way for the new one slowed the volume growth and pulled down the margins of JLR in Q3FY13. Revenue was up 2% Y-o-Y to GBP3.8bn on a volume growth of 10% in Q3FY13. EBITDA margins at 14% was lower Y-o-Y but was in line with last few quarters. We expect JLR margins to improve from here on as the new Range Rover gains traction. On the other hand the ramp downs related to the outgoing Range Rover Sport in Q2-Q3FY14 could have some impact on the mix during that period. With ~90% of the stock value coming from JLR, any slowdown in its volume growth would decimate the TML stock.Standalone business suffers due to weak domestic demand of CVs & sluggish passenger car business: The domestic business has been deteriorating off late. EBITDA margins fell to a 4-year low of 1.4% in Q3FY13, down 502 bps Y-o-Y and 387bps Q-o-Q. The cyclical downturn in the CV market coupled with a sharp decline in passenger vehicle market share has resulted in the bad performance by the standalone entity. However we believe the CV market should start to turn around as the economic activity improves. On the passenger car front, the company has been offering new models and has re-jigged the top management. It is also spending Rs 30bn on new product development which is a positive sign.Outlook: We expect JLR's performance to improve in Q4FY13 on the back of traction of AWD variants of Jaguar and a pick-up in new Range Rover volume which is already visible in the Jan'13, with volumes up 30% Y-o-Y. We are quite positive on JLR as we believe it is going through its strongest phase in the product life cycle. Also, we believe the increase in JLR's capex from GBP2bn to GBP2.75bn should be taken positively as it implies management's confidence on the future prospects of the business. There could be some more pain on the standalone entity for a couple of quarters more as we believe the CV market recovery is some way away.Valuation & Rating: We continue to value JLR at 9x FY14E P/E while we value the parent at a P/E 12x FY14E earnings. We reiterate our Buy rating on TML, while we revise our earlier target price downwards from Rs 370 to Rs 362 on the back of weak performance from the parent. We have modeled for FY13E/FY14E earnings of Rs31.9 and Rs40.1 respectively, down from our earlier estimate of Rs37.4 and Rs46.2. Even though the parent might report losses in the next couple of quarters we are bullish on the strength of JLR's portfolio and the upcoming models which command a higher ASP compared to the current ones," says FinQuest Securities research report. 
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