Tata Motors is top pick on surge in JLR sales: Kotak

Kotak Institutional Equities analyst Hitesh Goel explains to CNBC-TV18 that Tata Motors is on the top of his investment picks for the year thanks to the boost in JLR's Evoque and Freelander models which was caused by management initiatives that included the addition of a third shift at the company's Halewood plant.

Below is an edited transcript of the analysis on CNBC-TV18. Q: What do you make of the sales announced for Jaguar and for Tata Motors? Could that used to extrapolate an estimate on their sales for next year?
A: The sales was pretty good. The Evoque and Freelander sales have significantly increased to push retail sales. Tata Motors' sales touched around 30,000 to beat market expectations of close to 28,000 units chiefly because of the Freelander and Evoque.
It is clearly evident that the management's initiative in adding a third shift at the Halewood plant to help Evoque and Freelander production is taking effect.
Another positive sign was that Range Rover Sports has started to improve in the mix which is a higher margin model. The sales is slightly below the targeted level because the new Range Rover dispatches are not coming through yet.
But in Q4, the ramp-up on the new Range Rover will be completed. I expect a monthly sales of 33,000-34,000 units from Q4 onwards from the JLR stable.
So I think for next year, the expectations will be formed largely on how the new Range Rover performs and the launch of the new model of Range Rover Sports which will be launched in August-September 2013. Q: Are you factoring-in any EBITDA surprises from JLR?
A: We are looking at a 30-percent growth in EBITDA largely because we expect the new Range Rover and Range Rover Sports to increase in the mixed segment. They are high-margin and high realisation models, so margins should expand if they do well. The current rate of sales of Range Rover Sports infuses a lot of confidence that the market for the high-end segment is still pretty good. Q: The stock is now at Rs 290? What kind of targets could it scale up to in the next one year?
A: I think it will be difficult to throw earnings surprises in FY14 because the market is already building-in margin expansion and significant volume growth. I think a rerating is expected in the stock because if JLR manages to pull off a 30-percent EBTIDA growth it will set off a rerating of the stock. Though global macro-economic concerns cloud JLR, the effects could be nullified if the company manages to post significant earnings growth. Q: Mahindra and Mahindra (M&M) continues to shine as the star in the auto sector. What is your opinion on the stock and can you confirm if the company has pulled out of the race for Aston Martin?
A: Yes, I think they have pulled out of the Aston Martin. Investindustrial has already invested a 37.5-percent stake in the company. Being in the fray posed a key risk to the stock and that is now behind us. M&M was our top pick in 2011 and the stock has given very good returns. However, we believe that returns will be subdued over the next one year.
Rerating of the stock is unlikely because we believe that the tractor-business cycle will not go through a very big bull phase considering that the agricultural profitability is not expected to improve significantly.
M&M's construction segment is not picking up adequately to boost the tractor segment. So, we conclude that a rerating in the stock is unlikely. We have accorded a 'neutral' call on the stock, but our top pick in the segment remains Tata Motors. I think that is the only ‘buy’ call we have in the auto sector right now.