Buy Tata Motors - JLR surprises again - Elara Capital

• Rating : Buy
• Target Price : INR1,558
• Upside : 23%
• CMP: INR1,270 (as on 9 November 2010)

JLR surprises again

EBITDA margins zip on aggressive cost cutting, product mix

Tata Motors's Jaguar and Land Rover's (JLR) EBITDA margins zoomed to 16.6% in Q2FY11 (up 110bps sequentially) despite the negative impact of the currency movement, roughly to the extent of 200 bps. The company continues to cut cost further, demand scenario remains robust and geographical and product mix can improve further. Thus, we do not see any major threat to margins in the near to medium term unless there are big swings in currency rates (negative USD movement against GBP and vice-versa) and any unwarranted rise in commodity prices. We refuse to speculate on currency and believe input costs can be passed on hence assume that EBITDA margins can be sustained at 16% levels.

Struggling Nano impacts standalone margins

Costs on all fronts jumped up for the standalone business and we believe, the commissioning of the Sanand plant along with weak Nano sales was the chief factor for the increase in costs. With aggressive price hikes (~7% on Nano and 3-4% on CVs), the company can recover some margins in H2FY11. However, EBITDA margins would struggle in the event of Nano sales remaining sluggish.

Outlook and valuations

With the phenomenal improvement every quarter, JLR operations continue to drive valuations for the company. We value the company on both P/E and EV/EBITDA methodologies. Our fair value for JLR is INR938 per share. (7.5x FY12 EPS, 6x FY12 EV/EBITDA), and for standalone operations, it is INR504 (15x FY12 EPS, 7.5x FY12 EV/EBITDA) while we value other subs at INR116 p.s. (10x FY12 EPS, 1x EV/Sales). On a consolidated level, our target price of INR 1558 works out to 9x on FY12E fully diluted EPS of INR171 and 6.5x on FY12 EV/EBITDA (other than JLR subs). We maintain our 'Buy' recommendation on the stock.

Source : Equity Bulls

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