Tata Motors OUTPERFORM Price target: Rs1,502: Standard Chartered

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Tata Motors
OUTPERFORM (unchanged) Price target: Rs1,502


Summary
Consolidated results surpassed expectations with JLR reporting a strong margin of 16.6%. Standalone margin,
however, disappointed with a 360bps yoy decline to 9.7%. Post strong 2Q results, we raise our fully-diluted
consolidated EPS estimates by 7.2% to Rs123.5 for FY11E (Rs115.2 earlier) and by 0.4% to Rs134.9 for FY12E
(Rs134.3 earlier). We also raise the price target to Rs1,502 (Rs1,452 earlier) and reiterate OUTPERFORM




Results: Key points
Consolidated net profit zooms to Rs21bn – Revenue grew 36.4% yoy to Rs287.8bn given
strong volume growth of 32% yoy in India and 24.5% at JLR. Margin increased 700bps yoy to
14.5% (vs. expected 14.1%). Adj PAT, at Rs21bn, surpassed our expectation of Rs18.3bn.

Standalone margin declined by 360bps yoy to 9.7% – Standalone net income increased 44%
yoy to Rs115bn, in line with expectations. But the EBITDA margin declined 360bps to 9.7% due
to a sharp increase of 530bps in raw material to sales ratio.

JLR reports strong operating performance, margin at 16.6% – Net income grew a robust
58.3% yoy (-0.7% qoq) to Rs155bn given 24.5% yoy volume growth. EBITDA margin improved
significantly to 16.6%, an increase of 110bps qoq. Profit grew 7.7% qoq to Rs16.4bn.

Raise EPS estimates – We increase JLR’s margin estimate to 14.6% (+170bps ) for FY11 and
13.3% (+50bps) for FY12. We also revise our estimated GBP/INR exchange rate for FY11 from
Rs65.5 to Rs69. We lower the volume estimate for the passenger vehicle standalone business
by 2.7% (total volume by 1%) and EBITDA margin estimate by 50bps to 10.6% for FY11 and
40bps to 10.5% FY12. We revise our fully-diluted consolidated EPS estimates by 7.2% to
Rs123.5 for FY11 (Rs115.2 earlier) and by 0.4% to Rs134.9 for FY12 (Rs134.3 earlier)



Consolidated performance
Robust revenue growth of 36.4%
Total income grew 36.4% yoy and 6.4% mom to Rs287.8bn, in line with our expectation of
Rs290bn, on the back of volume growth of 32% yoy in India and 24.5% yoy at JLR.

EBITDA margin increases 700bps yoy
EBITDA grew by 163% yoy and 5.8% qoq with margin increasing 700bps yoy (-10bps qoq) to
14.5% (vs.expected14.1%), due to the overall decline in operating costs, given various cost
reduction programmes initiated by the company (especially at JLR), better product and
geographical mix at JLR, and strong performance at other subsidiaries. RM to sales ratio
declined 250bps yoy (+110bps qoq) and staff cost to sales ratio declined 300bps (flat qoq).

Adjusted PAT grew 3.5% qoq
The effective tax rate for the company declined to 12.4% (13% in 1QFY11) resulting in reported
PAT of Rsb22.2bn. Adjusted PAT after forex gains of Rsb1.2bn stood at Rs21bn, (vs. expected
Rs18.3bn).

Net debt to equity of 1.16x
Post the QIP, net debt to equity stands at 1.16x for the automotive business. Net debt is around
Rs200bn in 2Q FY11.


Standalone performance
Income grows 44% yoy in line with expectations
Net income grew at a strong 44% yoy and 10.4% qoq to Rs115bn, primarily on account of 32%
yoy volume growth. The average realisation increased 9% yoy and 1% qoq, as expected, due to
a change in product mix towards higher M&HCVs. It is also likely on account of an increased
share of distributed products of Fiat and JLR in India.


EBITDA margin declines 360bps yoy to 9.7%
EBITDA grew 5% yoy, while EBITDA margin declined by 360bps yoy to 9.7% due to a sharp
530bps yoy increase in raw material-sales ratio. Staff cost increased marginally by 20bps qoq
due to recent increase in staff costs at the Sanand facility (the Nano plant).


Raising EPS estimates
We increase JLR’s margin estimate to 14.6% (+170bps ) for FY11 and 13.3% (+50bps) for FY12.
We also revise our estimated GBP/INR exchange rate for FY11 from Rs65.5 to Rs69. We lower
the volume estimate for the passenger vehicle standalone business by 2.7% (total volume by
1%) and EBITDA margin estimate by 50bps to 10.6% for FY11 and 40bps to 10.5% FY12.
Given the above factors, we raise the fully-diluted consolidated EPS estimates by 7.2% to
Rs123.5 for FY11 (Rs115.2 earlier) and 0.4% to Rs134.9 for FY12 (Rs134.3 earlier).


Valuation: Raise target, reiterate Outperform
Tata Motors trades at 9.7x FY12E consolidated earnings and is attractive given the CV cycle
uptrend, Nano ramp up and re-rating of JLR. We raise our price target to Rs1,502 (Rs1,452
earlier) and reiterate OUTPERFORM.

Conference call highlights:
 Management positive on strong growth in demand across segments
 New product pipeline – BSIII range across CV segments, Magic IRIS, Venture and variants
from the Prima range and Safari refresh
 JLR generated cash of GBP268m post capex and R&D expenditure
 Forex partially hedged at JLR, which resulted in a forex gain on a sequential basis
 Standalone operating performance is likely to improve in coming quarters given the price hike
in the first week of October (1.5-2.5% across CV segment)
 Net debt at JLR GBP800m as of 2Q FY11, capex and R&D incurred of GBP400m in 1H, of
which GBP278m was towards product development
 Management expects JLR margin to sustain as going forward, product mix is expected to
improve with new models and XJ ramp-up; efforts to lower operating expenses and warranty
 Total capex for 1H was Rs43bn, Rs12bn was spent on Indian business and GBP400m at
JLR; management guided for Rs25-30bn capex for Tata Motors standalone and GBP800m
for JLR for full year FY11