Tata Motors - Laying a strong foundation for future growth; downgrade to Add - BRICS

Tata Motors issued a lower guidance for Q3FY13, citing change in product mix, unfavourable exchange rates, and higher incentives on the old Range Rover. The company also plans to increase capital expenditure to GBP2.75bn, as againstGBP2bn earlier, thereby impacting the consolidated FCF of FY14 and depreciation, which in turn, will impact its earnings. We lower our FY13 consolidated earnings estimate by 3% to Rs42 and by 5% to Rs47 for FY14. We lower our target price to Rs320 (earlier Rs331), mainly due to a rise in depreciation cost, which will impact FY14E consolidated earnings. We believe the current stock price discounts the lower margins in Q3FY13 and the impact of higher depreciation in FY14E. However, in view of the good returns given by the stock in the recent past, we downgrade Tata Motors to Add from Buy.

EBITDA is likely to be around the levels reported in the previous two quarters and EBITDA margin is likely to be slightly lower than that in the previous two quarters - EBITDA for Q3FY13 will be lower than earlier assumed and consolidated (new) EBITDA is estimated to come in at Rs57bn (earlier Rs65bn) and margin (new) at 12% (vs. earlier 13.5%). PAT will also be impacted and it (new) is estimated to be Rs22bn (vs. earlier Rs27bn), down 34% yoy.

Capital spending could increase to the region of £2.75 bn in FY14, after which, free cash flow could be negative - we believe the rise in capex due to the increased need for R&D and expansion is due to the pre-ponement of the company's plans and will not be a major negative for the stock. JLR plans to launch 40 new models/variants in the next 5 years, which requires appropriate investments in both R&D and plant capacities. In FY14 and FY15, there will be 5-7 new launches/variants by the company.

Valuation

We believe JLR's performance will continue to drive Tata Motors' stock, as it contributes 75% of revenue and90% of profit. In our view, the concerns over lower margins and profitability in Q3FY13 are also factored into the stock's current market price. We expect a better performance in Q4FY13, as Q4 generally contributes the highest to total volume (30% of total volume).

We value the standalone business at Rs54 per share, 12x our FY14 core earnings estimate, and JLR at 7x FY14 earnings (after adjusting for capitalisation for product development) at Rs319 per share. We assign a 20% discount to investments and subsidiaries (Rs265 per share) to arrive at a SOTP-based target price of Rs320 per share. We lower our target price to Rs320 (earlier Rs332), mainly due to the rise in depreciation costs, which in turn, will impact consolidated earnings for FY14E. In view of the good returns provided by the stock in the recent past, we downgrade Tata Motors to Add from Buy.

Source : Equity Bulls

Keywords