Tata Motors - JLR margins @ 14.6% disappointing; Downgrade estimates - Prabhudas Lilladher

Consolidated operating performance impacted by JLR: Tata Motors posted 16.7% YoY growth in the automotive segment revenues, whereas JLR reported a top-line growth of 65.7% YoY. This led to an overall 44.3% YoY growth in the company's consolidated top-line to Rs509.0bn (PLe: 522.0bn). On account of lower than expected EBITDA margin at JLR of 14.6% (PLe-16.5%), the consolidated EBITDA margin improved by only 30bps YoY to 14.1% (PLe: 14.7%). EBITDA grew by 47.9% YoY to Rs71.7bn. The company accounted for a tax credit of Rs18.2bn on account of credit for carry forward losses account in JLR. Adj. for forex loss of Rs1.7bn and the tax credit, PAT grew by 86.1% YoY to Rs45.9bn.

Q4FY12 standalone performance surprises positively: Tata Motors posted 14.4% YoY growth in its top-line at Rs163.9bn. Overall volumes grew by 18.4% YoY, whereas average realization/vehicle declined by 3.3% YoY on account inferior product mix skewed towards passenger cars. On account of tight control over other expenditure, EBITDA margins improved by 60bps YoY to 9.6%. As a result, EBITDA grew by 22.2% YoY to Rs15.6bn. Adj. for the forex loss of Rs2.1bn; Adj. PAT grew by 22.8% YoY at Rs7.8bn (PLe-Rs4bn). The higher than expected standalone profit partially compensated for the disappointment at JLR.

JLR's EBITDA margin decline 240bps QoQ @ 14.6%: JLR reported 51.5% YoY growth in revenue at ₤4,144m, mainly led by a 48.2% YoY improvement in volumes. Average realisation/vehicle declined 2.3% QoQ on account of inferior product mix skewed towards 'Evoque'. Other expenses increased by ₤90m on account of investment in new capacities. As a result, EBITDA margins declined by 240bps QoQ at 14.6%. Adj. for the ₤217m tax credit, JLR PAT stood at ₤422m as against ₤440m in Q3FY12. This, in our view, is a big disappointment given that the volumes for the quarter were up by ~11% QoQ and currency impact was minimal.

Analyst meet highlights; Capex guidance upped at JLR: Net Automotive debt to equity stands at 0.3:1. JLR is likely to come up with two new launches i.e. Jaguar XF station wagon in Q3FY13E and new Range Rover platform in Q4FY13E. The company increased its guidance for a capex and R&D spend at JLR to ₤2bn as against the earlier guidance of ₤1.5bn. JLR completed an unsecured Revolving Facility totalling ₤710m for 3-5years thereby strengthening its liquidity position. Management sounded cautiously optimistic regarding volume growth at JLR in Europe and UK.

Revise our earnings by 7‐8% downwards: We have revised our margin assumptions downwards ~250bps to 14.7% for FY13E and 14.6% for FY14E for JLR. As a result, we have revised our consolidated earnings by 6-8% for FY13E and FY14E.

Revised SOTP Valuation stands at Rs296/share: We value JLR at 4.0x FY13E EV/EBITDA multiple at Rs225/share. We value standalone business at Rs41/share, whereas we value the other subsidiaries at a 30% holding discount at Rs30/share. Our SOTP based Target price stands at Rs296/share as against Rs322/share earlier.

Adjusted for R&D, stock trades at a fair valuation of 8.3x FY13E EPS: The stock is currently trading at 6.7x FY13E EPS and 6.3x FY14E EPS. However, accounting for R&D expense of ₤400m (Rs32bn), the valuation stands at 8.3x FY13E and 7.8x FY14E. This seems fair compared with Global Peers' average P/E of 7-8x FY13E earnings. We believe there would be near term pressure on the stock price and the monthly volumes would be the key to the stock price performance. On account of ~7.2% upside from the current levels, we maintain our 'Accumulate' call on the stock.

Source : Equity Bulls

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