Maintain Buy on Tata Motors - Motilal Oswal

TATA MOTORS: Positive outlook for both JLR and domestic business; JLR's 1Q margins sustainable subject to stable forex

Motilal Oswal Securities met with the management of Tata Motors to get an update on the business. Key takeaways:

Strong momentum in JLR with positive outlook on volumes and margins…: For JLR, the management has guided for FY11 volumes at 240,000-250,000 units. August 2010 volumes were down 16% MoM due to seasonality (plant shutdown and holiday season in UK). Although it is losing ~1,000 units/month due to engine shortage, it is working with Ford and its vendors and expects shortage to ease in next 3-4 months. It expects JLR's 1QFY11 EBITDA margins of 15.5% to sustain, subject to stable forex movement, as there has been significant improvement in underlying product mix (Jaguar portfolio has turned profitable) and market mix.

…with focus on controlling cost: The management's confidence to maintain JLR's higher level of profitability also stems from its focus on reducing both variable and fixed costs. It is targeting to increase share of RM sourcing from low cost countries (LCC) to ~35% from ~18% currently. It has lowered its break-even point to 60-65% from 80-85% earlier. It is further focusing on cutting it to 55-60%. Over next 2-3 years, it is planning an assembly line each in China and India for servicing local and regional markets.

Domestic business - strong growth ahead, although margins might come under pressure in 2HFY11: The management believes it is at the beginning of new CV cycle which would be much stronger than previous cycles, due to far superior economic situation and balanced product mix between LCVs and M&HCV's. It is better placed, than previous cycles, to maintain its leadership driven by superior product portfolio. It believes LCV, especially the passenger segment, has significant potential to grow. It expects momentum in volumes to sustain driven by new product launches in LCVs, M&HCV's and UVs. However, EBITDA margins in domestic business would come under pressure due to RM cost push (on steel and tyres), impact of which will be partly diluted by price increase of 2.5-3% taken in FY11YTD.

Focus on further reduction in financial gearing by issuing equity: It is focused on further reducing financial gearing from ~Rs200b net debt as of Jun-10 or ~2x net debt-equity (excl. auto finance debt), by issuing further equity, internal accruals and monetizing investments. It plans to raise US$500m through equity issue, although terms are not yet finalized, through mixture of DVR and normal equity shares.

Valuation and view: The management is confident of maintaining strong momentum in all its businesses. We model FY12 volume growth of 15% (to 280,000 units) in JLR, 15% in M&HCV's (to 249,000 units), 15% in LCVs (to 330,000 units). Further equity issuance will reduce its gearing, although our estimates do not factor in this dilution (~4-6%). The stock trades at 8.9x FY11E consolidated EPS of Rs120.5 and 7.6x FY12E consolidated EPS of Rs140.3, and normalized P/E (adj. for capitalization) of 16.6x FY11E and 12.5x FY12E. Our SOTP-based target price of Rs1,244 implies a FY12 target P/E multiple (on normalized earnings) of 14.5x. Maintain Buy.

Source : Equity Bulls

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