Tata Motors - JLR product cycle in a sweet spot! - Antique

JLR - An exciting phase in the product life cycle

While the success of the Evoque has taken everyone by surprise and led to significant volume upgrades, we believe that the street is still under-estimating the Evoque's full potential (which we understand is also eating into the share of luxury sedans). Currently at around ~9k per month, we expect this traction in Evoque volumes to continue as it expands its presence in other geographies, with minimal cannibalization of existing Land Rovers.

Non-Evoque, we have high expectations from the recent full-fledged platform upgrade of the flagship Range Rover Vogue which would be followed by an upgrade of the Range Rover Sport (1QFY14). We'd take these launches very seriously, as both models combined account for ~50% of JLR's EBITDA and are witnessing a meaningful upgrade after ~11 years. We estimate JLR volumes at 370k/423k units in FY13e/14e (up 18%/14% YoY), assuming Evoque volumes of 108k/132k (implying a -3/+11% growth for the existing models in FY13/14).

Not relying on currency benefits any more...

Besides the INR depreciation against the GBP (which results in strong translation gains when translating JLR's GBP profits back to INR), even operationally, currency has been extremely favourable for JLR over the last couple of quarters - the USD had appreciated against the GBP {all JLR sales outside Europe (>50% of volumes) are USD denominated} and the EUR had depreciated against the GBP (~45% of components/materials purchased are EUR denominated, which off-set the negative impact of the ~25% of revenues that are EUR denominated). Given that this favourable trend in currency seems to have peaked, we bank upon an improvement in market mix to aid a gradual margin uptick. The fact that the fastest growing market (China) is also the most profitable bodes well for future margins.

Domestic business can't do much worse

MHCV are very sensitive to any improvement on the macro front. While the mini-truck segment (Ace) continues to perform extremely well, as we reach the fag-end of the rate-tightening cycle, we expect the main laggard in the domestic business (MHCV) to improve going ahead. We don't expect much out of the domestic car/UV business. Any positive surprise in volumes from this segment would be an upside risk to our estimates.

Expect some pain, before the gain... BUY!

With the flagship Range Rover due for a huge upgrade, the next quarter could see some pain, in terms of lower volumes coupled with higher incentives (to get rid of old stock), both of which would also weigh on margins. We acknowledge the same, while reiterating our BUY reco with a target price INR324.

Source : Equity Bulls

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