RBS upgrades Tata Motors to buy

Tata Motors: Equity fund raising nears end
Given  the  74%  equity  expansion  since  the  JLR  buyout,  our  concerns  about
further dilution have been lessened. Consolidated automotive net debt-to-equity
is  now  123%  and  should  support  new  product  launches  as  JLR  enters  a
seasonally-strong period. Upgrade to Buy with 20% upside potential.


Our concerns over repeated equity dilution ease as fund raising nears end
Since its leveraged buyout of JLR in April 2008, Tata Motors has repeatedly diluted equity to
reduce consolidated debt-to-equity (D/E) from a peak of 600%. With the recent qualified
institutional placement (QIP) of US$750m, total equity dilution since the acquisition is 74%,
reducing consolidated automotive net D/E to a healthy 123% and consolidated net D/E to
174%, offering credit rating benefits in the form of lower interest costs.
With subsidiary JLR entering seasonally strong period, we upgrade our PAT forecasts
The premium car industry enters its strong seasonal period in September, as reflected in
recent positive statements made by sector leaders BMW and Daimler. Our European auto
analyst remains positive on the premium segment’s prospects within the global industry,
which, coupled with JLR’s aggressive product launch plan, prompts us to raise our FY11-12
PAT forecasts for this unit by 31-39%. For the parent, aggressive commercial vehicle price
hikes, given emission norm upgrades, should offset the slow ramp-up in its car volumes.
Upgrade to Buy as our major concern is put to rest; business environment positive
As we raise our FY11-12 consolidated PAT forecasts by 21-27% and feel our key concern
over D/E is being addressed, we upgrade our rating on the stock to Buy with a target price of
Rs1,332.5, implying 20% upside potential. Incorporating higher market values for peer
comparators: we raise the value of Tata’s subsidiaries to Rs446.5 from Rs278.4, with JLR
accounting for most of the increase. In our calculations, JLR’s per share value almost
doubles to Rs451.2 as explained on page 5. For the parent, its three-stage DCF-based value
increases to Rs886 from Rs781 given its strong pricing power in commercial vehicles. At our
target price, Tata Motors’ consolidated valuation would be 6.5x FY12F EV/EBITDA. Key risks
are the impact of currency volatility on JLR’s profitability, a rise in crude prices or the global
economic outlook weighing on automobile demand.