Tata Motors -JLR on cruise control. : Kotak Sec

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Tata Motors (TTMT)
Automobiles
JLR on cruise control. JLR continued to surprise on the margin front with 2QFY11
margins increasing 110bps from 1QFY11 levels despite a less favorable currency. The
qoq improvement was driven by a 6% improvement in realizations (higher XJ mix) and
a 13% decline in absolute other expenditure. Upside on the JLR front more than offset
the disappointment at standalone operations. We raise our consolidated auto EBITDA
estimates by 15% , raise our target price to Rs1,420 and maintain our ADD rating.


JLR maintains strong margin rate while standalone operations suffer from higher costs
JLR reported consolidated auto (standalone + JLR) PAT of Rs19.9 bn, comfortably beating our
estimate of Rs15.4 bn. The upside was driven by continued strong operating margin performance
at Jaguar Land Rover. JLR’s better-than-expected results more than offset the margin
disappointment at standalone operations. JLR reported PAT of £229 mn and EBITDA of £373 mn
for 2QFY11. EBITDA margins of 16.6% were better-than-expected and improved 100 bps from
1QY11. The sequential improvement in margins was driven by a 6% increase in revenue per unit
and a 13% decline in other costs on an absolute basis. The sequential increase in revenue per unit
is surprising given that the currency movements were less favorable on a qoq basis. The
improvement seems to be driven by a higher mix of the redesigned XJ.

Standalone numbers hurt by higher costs
Tata Motors reported standalone PAT of Rs4.3 bn compared to our estimate of Rs5.1 bn. The miss
was driven by lower-than-expected EBITDA margin of 9.5%, down 160bps from 1QFY11. The
sequential decline was driven by sequentially higher costs. Raw materials as a percentage of sales
increase 50bps qoq while other costs increased 100bps as a percentage of sales. Realizations were
flat compared to 1QFY11. We would expect realizations to improve in 3QFY11 on the back of
price increases taken in October.

Raising consolidated auto EPS to Rs126 and Rs148 on higher JLR earnings estimates
We are raising our FY2011E EPS estimate to Rs126 from Rs95 prior to reflect higher earnings at
JLR. We are now modeling EBITDA margins of 15.6% for FY2011E compared to 12% prior. The
increase in our margin assumption is primarily driven by higher revenue per unit. We are now
modeling a 16% improvement in revenue per unit for FY2011E to £39,000 compared to £37,000
prior. This is still below the £39,500 in average realization for 1HFY11. Our FY2012E consolidated
EPS estimate is now Rs148 compared to Rs110 prior. We are maintaining our standalone FY2011E
and FY2012E EPS estimates at Rs27.2 and Rs35.2, respectively.

Raising target to Rs1,420 and maintaining ADD rating
We are raising our target to Rs1,420 from Rs1,150 prior. The increase in target price is
largely driven by the 15% increase in EBITDA estimates and lower debt levels at JLR. Our
Rs1,420 target is based on an 8X multiple for Tata Motors’ standalone EBITDA and 6X for
JLR EBITDA. We adjust JLR’s EBITDA estimate for the capitalized R&D to arrive at our EV. We
assign an Rs560 equity value for the standalone business, Rs760 for JLR and Rs100 for
subsidiaries.