Bullish on Tata Motors: Kotak Institutional Equities

JLR will declare its numbers tomorrow. In an interview to CNBC-TV18, Hitesh Goel, analyst at Kotak Institutional Equities says, the numbers would be better than April because of seasonality. “The April numbers were around 25,000, we are expecting around 28,000 for May,” he adds.

He is bullish on Tata Motors now. “We had a sell rating for a long time. We just changed our rating to buy because of sharp correction that happened in the stock price. That happened because of the disappointment in margins in the Q4. We believe that JLR volume growth will sustain because ‘Evoque’ is doing very well and is on waiting in most of the markets. So that will drive growth for JLR for this year,” he adds. Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: What are your first thoughts on the Tata Motors global JLR numbers, which come in tomorrow? Last time, those numbers resulted in a fairly sharp sell off in that stock. Do you think tomorrow the numbers might make some amends? A: Yes, I think numbers would be better than April because of seasonality. But the first quarter is generally slightly weak because there are shut downs in Europe. But whatever we have seen in US and Europeans sales, the number should be slightly better than April. Q: How much better because last month it was down about 30% month-on-month? What are you expecting month-on-month this time? A: The April numbers were around 25,000, we are expecting around 28,000 for May. Q: What's your call on the stock after everything it’s been through in terms of a price correction? Are you guys still going with a buy or have you become cautious on Tata Motors A: We had a sell rating for a long time. We just changed our rating to buy because of sharp correction that happened in the stock price. That happened because of the disappointment in margins in the Q4. We believe that JLR volume growth will sustain because ‘Evoque’ is doing very well and is on waiting in most of the markets. So that will drive growth for JLR for this year. There are many exciting products that will come through in FY14, which will drive growth for JLR. Q: Have you begun any rough calculations even of this kind of diesel levy that’s been talked about on small vehicles and on sedans? What kind of impact it would have on some of the diesel makers? A: Basically, if you look at the economics, at current rates customer is saving around Rs 4 per kilometers on a diesel car on a leg to leg basis. So, if annual average running for a customer is around 10,000 kilometers, he is saving Rs 40,000 in terms of fuel every year. So, if I assume that a lifecycle of a car is five years, you are actually saving Rs 2 lakh on a five year lifecycle of a car in terms of fuel. But on a capital cost perspective you are actually paying Rs 1.10 lakh higher, so actual savings are close to Rs 90,000. If you do a NPV of this saving, the actual savings is only Rs 65,000 over a five year cycle of a car. So in that sense if you put an additional excise duty of Rs 1.70 lakh, which is being talked about, it will have a very detrimental impact on the diesel car sales. Q: Do you think it’s likely a tax of that magnitude? If it happens, will you de-rate most of the companies which rely heavily on diesel vehicles for earnings? A: No, I don’t think this kind of tax is likely because that will create a lot of uncertainty for manufacturers to set-up diesel capacities in future. You will have a lot of disappointments from Volkswagen and these guys who are trying to localise diesel technology in India. So, it will have a very major detrimental impact to their capex plans in India. Secondly, it’s a one time gain that government will get from levying such a high tax on diesel vehicles, but it doesn’t actually solve the problem because of again crude price starts to go up, this differential will again increase. The only solution I feel is to increase diesel prices, additional tax doesn’t help. Also, if you look at passenger vehicles, they are only contributing 4% of the total diesel consumption in the country. So, it doesn’t reduce the diesel consumption in a way because most of the diesel fuel is going into tractors, industrial use, trucks. So, it doesn’t solve the problem at all. On the stock picks, I think maximum impact would be felt on Maruti. If there is a very steep increase in tax in the order of above Rs 1 lakh, it will impact Mahindra as well.