Tata Motors - JLR - Upgrade cycle to continue - Emkay

- Demand for Evoque continues to remain strong with an order backlog of ~3 months. XF, 2.2L is finding strong response in UK. New XJ continues to enjoy strong demand in China

- Capacity to reach to 400,000 units by 2H which can be further augmented by 10% with limited investments

- Range rover (2HFY12)/Range Rover sports (CY13) based on new premium lightweight architecture and XF sportsbrake (1QCY13) are the major launches in CY12 and CY13

- Upgrade FY13 vols./Sales/EBIDTA by 6%/4%/10%. Higher tax/depreciation restricts PAT upgrade to 4%. Introduce FY14 estimates with a EPS of Rs 56.8. Retain ACCUMULATE.

We met the management of Tata Motors. Key extracts are as follows

Evoque - Demand continues to remain strong

Current order backlog stand at ~3 months. Currently demand continues for top end of the model. Over the life cycle, expect the share of lower end version to increase. This will put pressure on average realizations. XF 2.2 ltr is getting strong response in UK. The newly introduced XJ in China continues to see strong demand.

Capacity - Capacity can be augmented upto 450,000 units with limited capex

Current capacity stands at ~375,000 units. JLR has recently increased capacity by 25,000 units at its Halewood plant (total capacity of 175,000 units). Another 25,000 units of capacity will be available at Solihull plant at the time of launch of new Range Rover (based on premium lightweight architecture). This will take total capacity at 400,000 units. There is further scope to increase capacity by another 10%. The total capex required would be ~GBP 200 mn. Thereafter company would have to incur higher capex to augment capacity. The idea is bring back plants to work on two shift basis as compared to current three shift operations.

Current Engine technologies - three different sources

Current engines that are sourced from Ford are based on three different technologies especially for 4 cylinder engines - JLR's own technology, Ford's technology and Ford-PSA's technology. The new engine capacity that company plans to invest in is primarily for meeting demand for smaller engines, including the smaller Jaguar that is stated for launch in 2014. The new plant will have the capacity to manufacture ~300,000 engines in phased manner. Expected investment in this is ~GBP 355 mn

JLR - New product launches

Apart from upgrades/variants, two major product lined up are new Range Rover (based on premium lightweight architecture) in 2HCY12 and XF sportsbrake in 1QCY13. Also F-type is expected in early CY13. New Range rover sports (based on premium lightweight architecture) will be launched by end CY13.

Volume growth outlook for premium cars/Uvs

Expect global premium car industry to report a growth of ~4% to 6% for CY13. Thus CY13 to witness growth rates in line with long term averages. Highest growth is expected in Japan (~15% to17%) due to low base. Europe is expected to report a decline of 5% to 6%. Growth in China is also expected to be around 12%, while US can grow by 8%.

Revision in FY13 estimates and introduction of FY14 estimates

We are raising our total volumes estimates for FY13 by 5.8% to 1.4m units to factor change in product mix in India business, strong volumes for Evoque and higher capacity addition. We upgrade our Net sales/EBITDA by 4%/10% in FY13 largely due to JLR. However, higher tax rates and depreciation restricts PAT growth by 4%, our EPS is revised upward by only 4%. We also introduce FY14 estimates. We factor in vol. growth of 9% in JLR and 10% in domestic M&HCV goods segment in FY14. We expect margins to expand 20 bps YoY largely led by improved performance in standalone business. However, higher depreciation charge in JLR and higher tax rates leads to 8.5% YoY growth in earnings.

Upgrading 4QFY12 estimates due to better than expected volumes

We are also upgrading our 4QFY12 estimates by due to better than estimated March 2012 JLR volume run rate. Thus, our net sales stand revised upwards by 1.9% and net profits by 6.6%.

Valuations

At CMP of Rs 317, the stock trades at FY13E/14E EV/EBITDA of 3.8x/3.3x and PER of 5.5x/5x. We value the company on SOTP basis and roll forward our valuation multiples on FY14 est. Thus, we attribute EV/EBITDA of 3.2x for JLR and 6.3x to standalone business (10% discount on FY13 multiples). We have upgraded our target by 16% to Rs 368. We retain our ACCUMULATE rating.

Source : Equity Bulls

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