Tata Motors - JLR again to the rescue, wiping away India sales concerns - Kim Eng

Q1 recurring EPS growth of 30% to Rs8.4 is better than expected. We attribute the entire earnings growth to a 34% increase in sales of premium car/SUVs of Jaguar Land Rover (JLR) to 83k units for Q1FY13. We maintain our FY13F volume of 340k (+8%) units for JLR due to 1) strong demand for its products in M4, 2) start of a third shift at its UK plant from this month enabling increase in production and 3) launch of new Range Rover and Sportbrake by end-2012. We forecast modest EPS growth of 11% for FY13F to Rs43.4 and maintain BUY on TTMT due to cheap PER of 5x. Our TP of Rs335/sh is based on PER of 8x FY13F.

Q1FY13 revenue + 29% YoY to Rs433bn on robust demand for Evoque. A continuation of strong demand in China led the 42% increase in volume for Land Rover and offset weak demand in Spain and Italy. We expect Evoque sales to increase further Q2 onwards due to reduction in waiting period, supported by start of a third shift at the Hallewood plant. We remain confident of FY13 volume forecast of 340k units for JLR because M4 already secured 32% of sales. We expect H2 sales to be boosted by 2 new launches.

India revenue -11% YoY to Rs105bn due to low demand for trucks, cars. For TTMT, Q1 sales for large trucks fell 23% to 34k units and for cars by 10% to 62k units. Q1 sales of 188k form 20% of our FY13F domestic volume of 921k units and factors in the slump in overall auto demand.

Q1 gross margin of 28.5% is ahead of our expectation of 23.7%. A favorable currency and product mix lifted Q1 margin for TTMT. Our gross margin forecast for FY13 is still unchanged because the anticipated shift in sales mix for H2 towards the new Range Rover and Jaguar products will moderate the increase. We remain confident of our FY13F EPS of Rs43.7 (+11%) because Q1 has already secured 20% of the full year earnings, which are set to improve further from Q2.

CAPEX of GBP 2bn for expansion, new products. Better-than-expected demand prompted JLR to increase its planned CAPEX by 30%. We expect 70% of the CAPEX to be funded by internal CF and balance via debt. This CAPEX will allow TTMT to increase sourcing of new small engines, increase overall capacity, and develop new product platforms.

Concerns of JLR's sales collapsing due to weakness in the European markets are unjustified. We expect a re-rating of TTMT's PER because JLR's sales have been robust and resilient thru the European crisis and increasing demand from China would offset any volume loss.

Source : Equity Bulls

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