TATA MOTORS-- JLR surprises yet again: Edelweiss

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􀂃 Profit well ahead of estimate; JLR driving the growth
Tata Motors’ (TTMT) reported Q2FY11 adjusted consolidated PAT of INR 20.9bn
(up 17x, 3% Q-o-Q) was way ahead of our and consensus estimates. While the
standalone EBITDA at INR 11.2bn (down 5% Q-o-Q) and PAT at INR 4.3bn
(down 7% Q-o-Q) were below ours and consensus estimates, JLR posted
stupendous numbers with PAT of GBP 229 mn.


􀂃 JLR realisations jump 7% Q-o-Q; margins zoom again
Despite currency movement turning unfavourable Q-o-Q, Jaguar Land Rover’s
(JLR) average realizations per vehicle rose a stupendous 7% Q-o-Q (27% Y-o-Y)
on account of a higher value product mix. The impact of higher raw material
costs (up 70bps Q-o-Q) were negated by stronger cost cutting measures, which
led to other expenses declining by 13% Q-o-Q. Consequently, EBITDA margin
jumped to 16.6% (up 110bps Q-o-Q), ahead of our expectation of 15%.

􀂃 Demand remains robust; further cost benefits to flow through
Luxury car demand remains robust particularly in China, Russia and the US. With
waiting periods on most JLR’s models ranging between 4 and 6 weeks (with
supply side constraints; notably engines from Ford), discounts are likely to
remain low. Benefits from key cost cutting measures—increased sourcing from
low cost countries and reduction in overhead expenses—are likely to counter any
adverse impact from foreign currency movements.

􀂃 Outlook and valuations: Positive; maintain ‘BUY’
The management’s tone on the company’s profitability outlook was perceptibly
positive. We believe JLR margins are sustainable in the medium term. We are
revising upwards our consolidated EPS estimates to INR 122 and INR 141 for
FY11E and FY12E, respectively. Our numbers are based on JLR’s EBITDA margin
of 15.5% (previously 14%; lower than the H1FY11 EBITDA of 16%).

With a more manageable D/E of ~1.2x, a stronger demand outlook and a
sustainably high EBITDA margin, we believe potential returns outweigh the risks
(unfavourable currency movements, potential crisis in Europe). We maintain our
‘BUY’ recommendation on the stock with a SOTP based target price of INR
1,393. On relative basis, we rate it ‘Sector Outperformer’.