Accumulate Tata Motors; target of Rs 325: Emkay

Emkay Global Financial Services is bullish on Tata Motors and has recommended accumulate rating on the stock with a target of Rs 325 in its January 24, 2013 research report.

• JLR’s new information update is to keep equity holders on the same page as bond investors in new issue n Update guides lower margins in Q3 and higher capex in FY14 - a short term negative
• Margins should normalize in Q4 as product mix improves and discounting reduces on new model (year) launches
• Higher capex though would lead to cut in TP by ~Rs 25 underscores managements confidence on new products
• Cut TP from Rs 350 to Rs 325 on higher capex assumptions; maintain ACCUMULATE

“During Q1 & Q2 the JLR EBITDA/Margins stood at £527mn/14.5% and £486mn/14.8% respectively. Our current Q3 EBITDA/Margin estimates stand at £596mn/15.0%. As per interaction with the company, owing to less favorable exchange rate, higher sales of lower margin Evoque / Freelander and high discounts in the outgoing Range Rover, the EBITDA/Margins for the quarter could be in the range of £550mn/c14.0%. While we were already building in a slight negative impact of currency in our estimates (reflected in flattish QoQ margins, despite 22% higher volumes) we now understand from management comments that the mix and discounting was much more unfavorable and could lead to a ~10% miss on our Q3 EBITDA estimate.”

“However, as the old Range Rover is discontinued and the new one starts selling from the ongoing quarter, along with sales of higher ASP new model year products, margins should likely normalize in Q4 with the improved mix. This is not a negative surprise for us given the company’s comment that this is from higher working capital calendarisation effect. Also, H1 capex from the company stood at £821mn as against a full year guidance of £2 bn. Given our expectation of higher H2 capex of £1.2 bn we were not expecting free cash flow generation during the period. Also, lower profitability in this quarter from poorer mix partly explains negative cash flows,” says Emkay Global Financial Services research report.

FIIs holding more than 30% in Indian cos

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