Buy Tata Motors on dips: Quant Broking

Raising capex guidance for FY15 by its UK subsidiary Jaguar Land Rover has caused selling pressure on Tata Motors, though JLR sales numbers for November were good. Shares of Tata Motors witnessed a decline on the second consecutive session on, falling 4.55 percent to Rs 360.60 apiece.

Basudeb Banerjee, auto analyst, Quant Broking said CNBC-TV18 the rationalisation was due. "You cannot source the finished materials from the UK and sell them globally across markets. So, at this stage, hefty capex to sales is necessary for JLR, and the management has been saying that stay ready for such negative surprises,” he said. He recommends buying the stock on dips. Below is the edited transcript of Basudeb Banerjee interview on CNBC-TV18 Q: What is your view on Tata Motors? How much of an effect will it have to its free cash flow (FCF) in FY15 due to the higher capex which is now envisaged for Jaguar Land Rover (JLR)? A: Broadly we were factoring in around 3 billion pound of capex for FY15 corresponding to a 14 percent volume growth. So, as per management guidance of 13 percent capex to sales that was broadly in-line and FCF would have been around 200-250 million pound. Now the capex guidance will be up by almost 0.5 billion pound, so 500-600 million pound. If the revenue projection remains the same, capex to sales will move up to almost 16 percent compared to 13 percent earlier guided levels. So unless the volume growth exceeds, the broader street estimate of 14 percent remain to somewhere around 18-19 percent, and when Mini Jaguar gets launched around mid of next year and pulls out somewhere around 50,000-60,000 units, then only capex to sales remain at 13 percent level, and the company can generate FCF of 200 million pound. But at a normalised volume growth of 14-15 percent with this kind of capex guidance definitely FCF will be under threat and somewhere around negative 200-300 million pound is highly possible. Q: Is the market being a bit myopic in the reaction to this capex plan? Last time this kind of capex actually led to quite a bit of improvement in their sales and profitability. Could something like this be repeated and the corollary question then would be is this a buying opportunity for Tata Motors stock? A: The broader picture one should look at is like today Mercedes-Benz sales somewhere around 0.4 million units per quarter globally whereas JLR is selling 0.4 million per annum globally. So the scale is yet on a nascent level. The whole story of JLR started really 3-4 years back. Whenever you are willing to put your global footprint in markets like China, Brazil, you need to have some local capacity. You cannot source the finished materials from the UK and sell them globally across markets. So, at this stage of the business cycle, hefty capex to sales is necessary for JLR and management has been saying that stay ready for such negative surprises. So under current circumstances if you look at monthly volume levels of around 36,000-37,000 at 16.5 percent margin level stock moved up from those Rs 320-330 levels to Rs 400 just because of the market frenzy where no positive surprise came from the business per se. So that rationalisation was due and we were anyhow saying from a short-term perspective. Tata Motors is fully valued at Rs 400, better wait for Rs 350 or below levels to make a fresh entry. One should also take note of the pound-dollar movement. Last quarter it was around 1.55, presently it is around 1.64, almost a 5 percent adverse move. So 50 percent of revenue coming from dollar denominated, I will not be surprised if there is a 150 bps margin deterioration quarter-on-quarter, so that is another negative aspect which is waiting in Q3 results other than poor standalone performance continuation. So combining all those three things this correction is highly logical and some more correction is also awaited. So around Rs 350 levels it will be a good buying opportunity looking at FY16 growth opportunities in perspective. Q3: What would your view be on Bajaj Auto? There was another brokerage which actually downgraded Bajaj Auto today. Do you have a view on Bajaj auto in terms of a target price which you are working with? A: Our target price is around Rs 2,100 where prime driver of Bajaj Auto is this dollar-rupee aspect. If you leave that thing aside domestic motorcycle market incumbents are doing pretty badly. Bajaj Auto YTD volume is down almost 8-9 percent. Hero MotoCorp is almost flattish year-on-year, so only growth is primarily coming from Honda Motors. Thus, under the present scenario, where revenue visibility is not at all great, dollar-rupee has been the margin driver and bottom-line driver. I do not know what was the brokerage price target earlier or that it had been downgraded to these levels, but our price target was anyhow at Rs 2,100 levels and I do not see a substantial upside from current levels looking at the demand scenario in the near-term and with the kind of cannibalization. Bajaj has been launching models like Pulsar 135cc, where it used to be a 180cc plus brand, so those kind of steps and launching various variants of Discover is going nowhere. Also, export markets, because of import duty increase across Sri Lanka, Egypt, Algeria, are also questioning their sustainability of 15 percent-plus export growth. These things are the negative part of the business model at current juncture. If the rupee tomorrow appreciates back to 58 levels that will be the last thing Bajaj Auto will ask for. Q: What about Hero MotoCorp? It has corrected quite a bit of underperformance this year. It has outperformed Bajaj Auto by about 20-25 percent this year, if not more. How would you approach that stock? A: If you look Hero Moto it is more of a domestic story. YTD volume of Hero is somewhere around 0 to 2 percent up, whereas YTD volume of Bajaj Auto is down almost 8-9 percent. Bajaj Auto domestic motorcycle market share is below 20 percent this time. So, if you look at Hero MotoCorp where domestic consumption theme is expected to recover 12-18 months down the line, any uptick in domestic volume from this 2-3 percent for Hero to even 5-6 percent along with the cost management initiatives taken by the management, blended together for Hero FY16 can be a great year. And, given the kind of derating Hero Moto has seen for last two years, it can gradually start seeing some uptick and target multiples of 14-15 times can easily come back. So I will say Hero Moto is definitely a good story from FY16 perspective, and barely 3-4 months from now on people will start reflecting that story. We have a reduce rating on Hero with a price target of around Rs 1,850, but we are confident with FY16 visibility Hero Moto definitely deserves a better rating and it can be an accumulating opportunity at current juncture. For Bajaj Auto anyhow they are down in dumps in terms of volume. Export problems are only increasing. The only saviour is dollar-rupee, so unless a major new hit model comes up, RE60 creates a magic in the export markets, I do not see major outperformance from the stock in the near-term. However, the key thing for Hero is the actual execution of the cost-cutting initiatives which the management has guided, so from current margin levels of 11-12 percent management is guiding to take it up to 16-17 percent, how much that gets executed is a matter of time, but even partial margin improvement will definitely be a cause for rerating for Hero and it can give a decent upside from these levels.