Tata Motors - JLR traction continues; maintain Buy - Centrum

We retain Buy rating on Tata Motors (TAMO) with a TP of Rs.367, upside of 31% driven by continued traction in JLR. In 1QFY14, JLR's performance surprised positively with EBITDA margins beating our estimate by 160bps at 16.5% largely driven by richer product-mix (RR, F-Type) and currency benefits. Consolidated margins were higher at 13.3% vs. our estimate of 12.9%, with JLR the key driver despite weak standalone performance. We expect JLR's volume momentum to continue spurred by the success of new launches and strong product pipeline over FY14E-FY16E. Also, margin momentum should continue as the full benefit of the new launches comes through.

Strong product pipeline lends visibility to JLR revenues and margins: In 1Q, JLR's net revenues stood at £4097mn (in-line, up 13% YoY, down 19% QoQ), EBITDA margin was higher at 16.5% vs. est. 14.9% with PAT at £304mn. ASP at £45,211 (up 3.7% YoY and 4.1% QoQ) was driven by a richer product mix. Success of recent launches and strong product pipeline will boost volume growth. The new launches include Range Rover Sport set to retail in August '13, the new Freelander and aluminum Discovery in FY15E and a small Jaguar in FY16E. The company recently showcased XKR and XJR models.

Standalone ops disappoint, but better than our expectations: Domestic business continues to face headwinds. Weak marco environment is impacting M&HCV and PV sales. LCVs are slackening and pricing environment has become weak. However, excluding the dividend payout of Rs.15bn from JLR, the standalone entity registered a loss of Rs.6bn compared to estimated loss of Rs.8bn.

The three key catalysts: 1) Improving market confidence on cash flows and EBITDA margin sustainability as JLR reaps the benefits of new models and an improving mix. 2) New product introductions over FY14E-FY16E 3) Significant phase of annual product restocking in 2HFY14E, with improving deliveries to key markets (UK and China) and ramp up in new RR Sport production.

Valuations and Risks: At the CMP of Rs279, the stock trades at 7.2x/6.3x FY14E/FY15E Conso EPS of Rs38.7/Rs.43.9 respectively. We retain Buy with a target price of Rs.367 (based on SOTP of Rs.8 for standalone operations, Rs.19 for subsidiaries (excluding JLR) and Rs.339 for JLR). Key risks: 1) Slower-than-expected growth in key markets, increase in discounting trends by global luxury OEMs and 2.) Stricter environmental regulations (as seen in the past with implementation of new norms in China).

Source : Equity Bulls

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