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Tata Motors (TAMO.BO)
2QFY11: JLR EBITDA Beat Offsets Disappointing Parent Results
2Q parent results disappointed on margins — 2Q EBITDA margins at 9.7% were
down 160bps Q/Q, 50bps below expectations. Slippage attributed to hardening
material costs and SGA ahead of expectations (v. similar to 4QFY10). Mgmt noted
in the con call that margins should improve sequentially as price hikes effected in
Oct positively impact results. EBITDA forecasts unchanged in parent business.
Balance sheet on the mend, working capital trends stable — Mgmt noted net auto
debt-equity is down to 1.16x post recent QIP – in line with mgmt’s target to reduce
debt /equity to 1:1 levels (from ~2:1 end FY10). Consolidated gross debt end
2QFY11 was Rs36.5bn (flattish over past 6 months). Working capital trends stable
– inventory/receivables at ~33/21 days of sales.
beat our estimates by ~£50m as higher realizations (~£40,760) more than offset
lower Q/Q volumes. Mgmt remains fairly optimistic given healthy outlook in China,
UK, US and Russia. The waiting period on key models continues between 4-6
weeks in key markets, implying lower incentives. We revise JLR EBITDA forecasts
meaningfully, up by 15%/23% for FY11/12 driven primarily by better pricing. JLR
volume estimates revised by moderate 5-8% over same period. Consolidated EPS
for FY11/12E/13E is ~Rs145/186/205 respectively, up from Rs126/136/135 (EPS
uptick in FY12 also aided by lower than forecast tax provisioning).
New TP of Rs1,533 — based on a sum-of-parts methodology, where we value
TTMT core (India) business and subsidiaries at Rs773 ( 8.5x Mar12E EV/EBITDA).
Subsidiaries are valued at Rs91/sh. We value JLR at Rs670/share (earlier Rs340)
based on 4x Mar12E EV/EBITDA (earlier 3.5x). We slightly increase multiple to
reflect better visibility in earnings, while ensuring relative parity with EU auto
OEMs that are trading at 3-4.5x. Key risks? Erosion in JLR volumes/pricing.
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