Despite dismal Q3, Kotak sees Tata Motors to hit Rs 340

Despite a weak December quarter earnings, analysts feel Tata Motors still has steam left for a run up. Hitesh Goel, analyst, Kotak Institutional Equities is positive on the stock expecting it to go upto Rs 340.

Goel expects that in the fourth quarter one will see the full ramp up of the new models especially the new Range Rover and the margins will go up from here on JLR front. "We are looking at a 20 percent sales growth for JLR in FY14, driven by 16 percent volume growth and EBITDA margin expansion of 150 basis points from current levels", he adds. Below is the verbatim transcript of his interview to CNBC-TV18 Q: Just to get the price tags in place, what do you have going right now for Tata Motors in terms of a price target, an EPS target and what kind of topline growth do you expect from it? A: We have a target price Rs 340. We are very positive on this stock. If you look at the current results, the EBITDA level on consolidated level it was mostly in line with the street expectations. JLR margins held up very well despite a quarter where they had to phase out the old Range Rover. Significant discounts were given there. So going forward, in the fourth quarter one will see the full ramp up of the new models especially the new Range Rover. In that there is a three-six months waiting across markets. Margins will go up from here on JLR front. We are looking at a 20 percent sales growth for JLR next year in FY14 driven by 16 percent volume growth and EBITDA margin expansion of 150 basis points from current levels. Basically we are very positive. We believe that market is unduly worried about near term performance. However, that was due to transitioning to a new model product cycle. There are a lot of model launches coming through and those augers well for JLR. Q: Do you expect the pain in the domestic market to continue though for a few more quarters? How much of a takeaway can that have from the JLR performance? A: In terms of EPS, domestic business is not a significant contributor to earnings. This year will there be a loss of around Rs 2 on the EPS front on standalone estimates versus the consolidated EPS of Rs 38. Next year, we are looking at modest recovery of Rs 2 plus positive from the standalone side versus a consolidated EPS of Rs 44. It just contributes five percent of the consolidated EPS. How much cash they burn in the standalone business is more relevant for standalone business. My sense is that they are burning around Rs 1,000 crore of cash in standalone business. They are making cash in the JLR business to basically offset that. So, it is not a big brag on the cash flow also. The CV sales are down 30 percent year to date which over the years we have not seen de-growth after such a big decline next year. If economy is still growing next year, I still see a single to low double digit growth. Although it will depend on how investments and capex moves in the economy. I am still positive on the CV sales for next year. I am not hoping for a decline next year. So in that sense, I am fine with standalone business. Next two quarters will be sluggish because the truck operators are delaying purchases, but we are still positive for next year. Q: I believe the management was extremely conservative in the conference call that they did yesterday. Do they match your enthusiasm or optimism about where JLR’s operations will be going over the calendar year? A: The profit warning that management had given on JLR was that they had talked about EBITDA estimate of JLR closer to first to second quarter levels. It came out significantly higher than 500 million pounds, which they were indicating when they gave the profit warning. So, basically management is under guiding to some extent. There are lots of variables in JLR so it is very difficult to project quarter on quarter margins. Their geographical and model mix, also the discounts keeps on varying depending on product lifecycle. So these types of variations will continue but we believe that volume growth is very strong. JLR is gaining market share. We are very positive on the volume growth side. Margins should essentially go up ex-currency. Currency will be a major play here. However, ex-currency and margins should go up given the product mix.