Tata Motors-2Q FY11: Consolidated PAT of Rs22.2B ahead: JPMorgan

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Tata Motors Overweight
TAMO.BO, TTMT IN
2Q FY11: Consolidated PAT of Rs22.2B ahead of
estimates, JLR EBITDA margin of 16.6% surprises




• Tata Motors’ 2Q consolidated PAT of Rs22.2B was significantly ahead of our
and consensus estimates. The variance was driven by JLR, which reported
EBITDA of 16.6% (up from 15.5% in 1Q) and a PAT of £238MM (c. Rs17B).
However, domestic segment profits were below estimates at Rs4.3B (flat yoy)
as the EBITDA margin of 9.7% was down by 160bp qoq.
• JLR 2Q results surprise: 2Q revenues of £2.25B were driven by volumes of
55,134 units and realizations of £40,759 (which were up +7% qoq). Realization
growth was aided by a healthy pricing environment and improved product mix
(the new XJ sales came in excess of 6,000 units, up from 2,500 units in 1Q).
Thus, the EBITDA margin expanded to 16.6%, driven by improved product
mix, currency benefits (though lower than in 1Q) and cost-cutting initiatives.
• Domestic business margin declines: The local segment PAT of Rs4.3B was
below estimates as the EBITDA margin of 9.7% was down by 160bp qoq, led
by higher expenses: raw material cost ratio increased +50bp qoq while other
expenditure was +100bp higher qoq. Management expects margins to improve
in 2H, given price increases implemented over the year.
• Conference call takeaways: JLR Volumes: Volume growth is being driven by
China (+72% yoy) and the US (+26% yoy). The RR Evoque is likely to be
launched next summer. Capex: At JLR is likely to be £800MM - £1B p.a. over
the next few years. While discussions to set up a plant in China with local JV
partners are ongoing, production is still 12 months away. Current impact -
Management highlighted that while currency movements may turn adverse over
2H, they should be partially offset by cost-cutting initiatives as well as
encouraging volume offtake. Further, the company takes hedges of c.3-9 months

on forward sales, which should reduce volatility. Supply constraints: Ford is
likely to de-bottleneck engine capacity over the next few quarters. Local
business: While emission norms have rolled over, management believes that
demand is likely to be healthy in 2H as well. Gearing: The company’s net
automotive debt is Rs.20B and gearing ratio stands at 1.2x (post QIP issuance).
• We value the company on a sum-of-the-parts basis (8.5x FY12E EV/EBITDA
for the core business, 0.44x EV/Sales for JLR, 11x P/E for Tata Daewoo, 13x
P/E for Tata Technology, and 1x P/BV for Tata Motors’ Finance) given that
subsidiaries comprise a substantial proportion of the business. We are revising
our estimates to factor in the improved profitability at JLR. Downside risks:
Adverse currency movements at JLR could affect margins, and rising interest
rates in local market could impact CV sales.