Buy Tata Motors - JLR margins vroom - Elara Capital

• Tata Motors
• Rating : Buy
• Target Price : INR1,223
• Upside : 21%
• CMP : INR1,007 (as on 11 August 2010)

JLR margins vroom

Product mix, forex gains boost JLR EBITDA margins

Tata Motors-owned Jaguar and Land Rover's (JLR) EBITDA margins improved substantially in Q1FY11 to 15.4% (up 410bps sequentially) supported largely by currency gains (appreciation of USD vs GBP), change in product-mix favouring high-end models and advantageous change in geographical-mix. While some of these factors are likely to stablise or even reverse going forward, we expect margins to stay robust on account of better realisations, improved capacity utilisation levels and continued cost cutting measures. We revised our EBITDA margins upwards to 13% and 13.2% for FY11E and FY12E respectively.

JLR volume guidance remains strong; R&D costs increase

The company continues to see a healthy demand for Land Rover (LR) range of vehicles and the newly launched Jaguar XJ. We increase our volume assumptions to 64,000 units for Jaguar and 164,000 for LR. We also model in higher realisations (growth of 12% YoY) largely on account of the product mix change. The management has upped its R&D cost guidance for FY11E to GBP550mn (earlier GBP400mn). The company now achieves its free cash flow breakeven at 9.2% EBITDA margins on FY12E sales (as against 7.7% earlier).

Standalone operations report better than expected margins

Tata Motors standalone EBITDA margins at 11.3% were ahead of expectations as raw material costs surprisingly declined 10bps sequentially. However, higher interest costs (higher debt on account of WC) and depreciation costs (capitalisation of the Sanand plant) offset some of the gains.

Outlook and valuations

We value the company on a sum-of-parts methodology, assigning INR 565 per share to standalone operations at 8.5x FY12 EV/EBITDA (Ashok Leyland trades at 10x), INR 546 per share to JLR at 4.5x FY12 EV/EBITDA (Daimler and BMW trade at 9.1x and 8x, respectively) and INR 112 per share for subsidiaries and associates. We upgrade the target price to INR 1,223 and maintain our 'BUY' recommendation.

Source : Equity Bulls

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