Tata Motors- 2Q FY11 - JLR does it again!: Macquarie

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Tata Motors
2Q FY11 - JLR does it again!
Event
 Tata Motors reported better than expected 2QFY11 results driven by solid
performance at Jaguar Land Rover (JLR: unlisted). We maintain Outperform,
as we believe that improved operating margins at JLR are sustainable and
domestic commercial vehicle business remains on growth track.


Impact
 Solid 2Q results: Supported by a strong growth in volumes in domestic
business and improved realisations at JLR, Tata Motors reported consolidated
operating income of Rs288bn, up 37% YoY. While standalone margins at
9.7% were lower than our estimate mainly due to high employee and other
manufacturing costs, JLR surprised positively with PAT of £238m.
Consolidated PAT post minority interest at Rs22.2bn was significantly ahead
of our estimate of Rs16.4bn and street estimate of Rs14.4bn.
 JLR margins appear sustainable; generates significant cash flows: With
realisation improvement of over 6.5% due to favourable product and region
mix and no significant revision in raw material costs, JLR reported margin of
16.6% for the quarter. While we expect margins to decline in the coming
quarter as raw material prices are negotiated, with initiatives on increasing low
cost sourcing, rationalisation of components etc margins for JLR appear
sustainable at ~15%. JLR also generated net cash of £268m (after capex and
product development expenses) and repaid debt of £241m in the quarter.

 Leverage to reduce below 1.0x: Tata Motors net automotive debt to equity
reduced to 1.73x as compared to 1.96x as of last quarter. Taking into account
the US$750m raised through QIP issue in October, the company’s net debt to
equity would stand reduced to ~1.16x. With strong operating cash flows and
possible stake sale in unlisted subsidiaries, we believe that leverage will fall
below one time.

Earnings and target price revision
 Increased consolidated earnings for FY11, FY12 and FY13 by 20%, 16% and
13% respectively mainly on account of increase in JLR estimates. Increased
SOTP based target price to Rs1500 from Rs1350 earlier.
Price catalyst
 12-month price target: Rs1,500.00 based on a Sum of Parts methodology.
 Catalyst: Improving domestic and JLR sales and quarterly numbers.
Action and recommendation
 Reiterate Outperform: Tata Motors operations have seen a strong revival
from improved sales in the domestic and developed markets on the back of a
macro-economic recovery. We believe this, along with the aggressive cost
cutting measures being undertaken at JLR, will result in ~23% increase in
consolidated EPS over the next couple of years. At ~8.2x FY12E PER and
5.3x consolidated FY12E EV/EBITDA the stock appears attractively valued.