Tata Motors – 2QFY2011 Result Update-Angel Broking

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 Tata Motors – 2QFY2011 Result Update

Angel Broking recommends an Accumulate on Tata Motors with a Target Price of Rs1,458.

Consolidated performance substantially above expectations: Tata Motors (TML)

recorded an outstanding performance for another quarter of FY2011. Net profit

for 2QFY2011 surged to `2,210cr as against net loss of `22cr in 2QFY2010.

This exceptional performance came on the back of improved operational

performance at JLR and other key subsidiaries of the company. Further,

favourable currency movement and restructuring efforts at JLR helped to improve

margins at consolidated levels. OPM increased by 686bp yoy to 13.9% for

2QFY2011. Top-line at `28,782cr (up 36.5% yoy) was aided by higher growth in

domestic and JLR volumes and a substantial ~27% yoy jump in JLR realisation.

Standalone performance: On standalone basis, the company reported ~44% yoy

growth in top-line aided by the ~32% yoy growth in volumes and 10.3% growth

in realisation. Operating margins stood at 9.5%, a decline of 365bp yoy due to

higher input cost. Thus, net profit declined 40.7% yoy to `433cr due to lower

other income of `77.5cr (`421cr in 2QFY2010).

Outlook and Valuation: We recommend an Accumulate on TML, with a revised

SOTP Target Price of `1,458 (`1,214). We have valued the domestic core

business at `488/share, implying 6.5x FY2012E EV/EBITDA and P/E of 13x

FY2012E EPS. Our embedded value of the subsidiaries and investments in TML's

books (including JLR) works out to `970/share.

􀂄 JLR recorded top-line of £2,247mn and operating profit of £351mn for the

quarter. JLR’s combined volume for 2QFY2011 increased to 55,134 units

(44,305). A shift in product mix towards higher-margin vehicles as well as

reduction in discounts or subventions on new product launches led to better

average realisations yoy and qoq. This was largely supported by the good

growth in volumes and around 24% yoy and 27.2% yoy increase in

realisations. JLR recoded a substantial jump in OPM at 15.6% (2.3% in

2QFY2010) owing to the cost cutting measures initiated by the company and

favourable currency movement. After providing for depreciation, interest and

tax JLR posted profit of £238mn (or ~`1,737cr) for the quarter.

􀂄 JLR has exposure to the USD and Euro. However, the company’s Euro imports

exceeded its Euro sales. On the USD front, it is a net receiver of USD. Thus,

favourable currency movement in the USD and Euro has benefitted the

company in the last few quarters.

􀂄 Average realisations for the quarter came in higher than our expectation at

around £40,759, which brought a positive impact on EBITDA to £351mn as

against our expectation of ~£287mn. This was aided by better product mix

(launch of XJ), favourable currency movement and better pricing. The

company sold about 5,000 units of the new XJ as against 2,500 in

1QFY2011. The new Jaguar XJ was launched in May 2010. Cumulative YTD

wholesale volumes are 8,709 units.

􀂄 JLR has around 20-25% sales in the US and close to 55% sales in Europe and

UK. JLR is highly dependent on the UK, which continues to be a significant

market for it. Demand outlook is strong for the UK, China and RoW. The US is

witnessing stable demand whereas Europe is facing some weakness. Russia is

fast catching up. Supply constraints with respect to engines from Ford is

resulting in demand outstripping supply (reflected in higher retail sales vis-avis

wholesale billings). Waiting period for JLR products would be anywhere

between 4-6 weeks.

􀂄 TML intends to incur capex of £800-1,000mn for new product development

under the JLR brand annually for the next 2-3 years, and incurred a capex of

about £400 in 1HFY2011. JLR operates with a negative working capital cycle.

􀂄 Net cash flow generated (post capex, product development expenses and

working capital changes) of £291mn for H1FY2011. There was reduction in

short-term borrowings of £241mn in 1HFY2011. Inventory days decreased to

85 days in Sept’10 from 99 days in Sept’09 (77 days in June’10).

􀂄 Thus, on overall excellent performance, we revise our PAT upwards for JLR to

£879mn (£661mn earlier) and £957mn (£680mn earlier).

Subsidiaries showing substantial growth in performance: TML’s other key

subsidiaries combined further recorded 3.6% yoy increase in net sales to around

`1,370cr (`1,322cr) in 2QFY2011. On account of the increase in net sales in

almost all its subsidiaries and improved operating leverage, subsidiaries combined

recorded a yoy increase in net profit for the quarter to `132cr (`88.7cr). HVAL and

HVTL reported significant improvement in top-line and bottom-line owing to

continued growth in domestic MHCV volumes. The subsidiaries also plan to

venture into manufacturing axles for the LCV range of vehicles and construction

equipment.

Total vehicle financing disbursals (TMF) for 2QFY2011 stood at `1,766cr, an

increase of 14% yoy, mainly on account of the significant volume traction in the

domestic four-wheeler industry. The book size at the end of Sep’10 for TMF and

TML (vehicle financing) stood at `7,566cr and `415cr, respectively. TMF’s market

share for 1HFY2011 stood at 20.7%. Net interest margins (NIM) of the vehicle

financing business (TMF) for 2QFY2011 was 10.9%.

Outlook and Valuation

FY2010 has been a year of recovery for TML’s standalone business. The cut in

interest rates and overall improvement in the financing scenario helped TML in

reporting better volume growth in FY2010. Volume traction continued in

1HFY2011, with improved liquidity and further improvement in IIP. Our estimates

for TML factor in around ~12% CAGR in commercial vehicle (CV) volumes over

FY2010-12E and ~36% CAGR in passenger vehicle (PV, including Nano) volumes.

Following recovery in its core business, TML’s key subsidiaries (linked to the

fortunes of CVs) are also expected to show good results.

Moreover, with the positive trend in the external environment (in financial markets

and improvement in general liquidity), TML has met most of its funding

requirements (including JLR) at reasonable terms. Further, full recovery in the

domestic CV cycle reduced the pressure on cash flows and has facilitated debt

repayment. JLR has also recorded excellent recovery aided by good recovery in its

key markets. We expect the launch of new products in 2010 to help JLR register

~14% volume CAGR over FY2010-12E.

We have also revised our OPM estimates to factor in higher operating efficiency in

both its domestic and overseas operations. However, we await further clarification

on the tax outgo at JLR (at present JLR does not have any tax liability in the UK and

overall tax rate is lower due to the statutory operations in various countries).