Buy Tata Motors; target of Rs 325: Motilal Oswal

Motilal Oswal is bullish on Tata Motors and has recommended buy rating on the stock with a target of Rs 325 in its December 5, 2012 research report.

“Tata Motors maintains JLR volume guidance at ~360,000 units for FY13, with ~100,000 units of Evoque and 5-7% growth in non-Evoque portfolio. The recent disappointment in JLR monthly volumes has been largely due to slower than anticipated ramp-up of the new RR, resulting in production loss of ~20,000 units since August. The company expects production to ramp up from December. JLR has multiple levers to improve its sustainable margins over the next 2-3 years. The new RR would be accretive at both the EBITDA and PAT levels – the benefits would be fully reflected in FY14. As it fully executes its modular platform strategy – two models per platform by 2016 from 1.28x currently, sustainable margins would expand by 150-200bp. Further, over the next 2-3 years, its captive engine initiative and Chery JV (China) would help reduce costs.”

“India business continues to be under pressure (except LCVs). While there are no visible signs of improvement for MHCVs, discounts have reduced MoM since September 2012. LCV growth remains robust, with no major threat to margins over the near to medium term. The domestic passenger car business continues to struggle, with lower capacity utilization, higher discounts and ad spends. JLR’s current elevated investment program aimed at filling product gaps is likely to continue till FY15; it expects to remain FCF positive even during this investment phase. Capex would fall in line with its peers to 10-12% of sales post FY15 as against 13-14% till FY15. However, Tata Motors expects to be a zero-debt company in the next two years, barring any significant pressure on either business.”

“We are cutting our EPS estimates for FY13/FY14 by 2%/3.4% to INR32.5/INR39.3, building in slower ramp-up of the new RR and continued weakness in the domestic business. However, the impact is diluted by lower than expected depreciation and amortization on the new RR. The stock trades at 8.5x FY13E and 7.0x FY14E consolidated EPS. Maintain Buy with a revised target price of INR325 (FY14 SOTP) – 20% upside,” says Motilal Oswal research report.

FIIs holding more than 30% in Indian cos

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