Tata Motors - Standalone disappoints but JLR stays on course; Maintain Buy - Centrum

The overall results for Tata Motors (TAMO) for 3QFY13 reflected the same trend of the past few quarters. The standalone operating performance continued to remain under pressure with EBITDA margins at 1.4%, the lowest in the past 15 quarters, impacted by elevated marketing spends and pricing pressure across the segments. The management expects standalone margins to remain under pressure. JLR performance stayed on course registering EBITDA margin of 14.0%, lower by 80bps QoQ despite realization drop of 5.5%. ASP QoQ were impacted due to overall model-mix and also on account of higher contribution from low end Evoque variants. Variable marketing spend across geographies were also on the higher side. We believe that the recent success of the New Range Rover, smaller engined XJ and XF coupled with planned launches of Range Rover Sport and FType reflect a strong product line up that will aid strong volume growth for JLR going forward. The management also indicated higher profitability for the New Range Rover due to the sharing of platform with Range Rover sport. We expect EBITDA margins for JLR to inch up in 4QFY13 largely driven by higher contribution from high margin new Range Rover and strong volumes as traditionally 4Q is strong for JLR. We continue to remain positive on the stock and maintain Buy rating with a target price of Rs.347.

JLR stays on course; standalone disappoints: JLR reported revenues of £3.8bn, EBITDA of £533mn and PAT of £296mn. Despite lower ASPs (down 5.5% QoQ led by model mix) and higher employee cost, the drop in EBITDA margin was restricted to 80bps at 14% QoQ. Standalone operating margin continued to remain under pressure at 1.4% (one of the lowest in the past 15 quarters).

Con call takeaways: 1) Given the high marketing and publicity initiatives for its PV portfolio, domestic margins are likely to remain under pressure 2) Volume growth in LCV/SCV segment will remain strong, but M&HCV outlook remains challenging 3) JLR management is optimistic on volume traction driven by strong product line up 4) It reaffirmed annual capex guidance of £2.75bn on account of higher investments in new products and R&D 6.) Guided capex of Rs.30bn for the standalone entity over the next 4-5years, 25-30% to be utilized for R&D and 5) Pegs net automotive debt/equity at 0.37x (vs. 0.29x QoQ) on a consolidated basis and 0.89x (vs. 0.77x QoQ) on a standalone basis 6.) Employee cost on JLR side was higher QoQ due to both LR and Jaguar plants now operating in 3 shifts.

Valuations and Recommendation: At the CMP of Rs297, the stock is currently trading at 8.2x FY14E consolidated EPS of Rs36 and 7.2x FY14E consolidated EPS of Rs41.5. We continue to be positive on the stock and maintain Buy rating with a target price of Rs.347.

Source : Equity Bulls

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