India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Motors Limited
Homegrown Multinational!
Investment rationale
JLR - The key driver!
JLR has witnessed a phenomenal turnaround and what's commendable is
the stellar performance looks sustainable. On the volumes front, we expect
JLR to maintain the strong momentum driven by the positive response to its
newer products coupled with the increasing demand for luxury cars from
emerging markets. The high-waiting period on some of its newer models (4-
6 weeks) would also reduce gradually as engine supply from Ford starts to
keep pace with the buoyancy in demand.
On the margins front, barring any adverse currency movement, margins are
expected to sustain above the 16% mark as the cost-cutting programme gains
traction - the full benefit of which would accrue over the next few quarters.
Beneficiary from strong CV cycle
The demand drivers for the company's CV business are stronger than ever
given its high co-relation with the uptick in industrial activities. Uptick in
industrial production has kept freight movement extremely buoyant and brought
back the pricing power with the freight operators. Tata Motors is the biggest
beneficiary from the same given its 60% market share in CVs.
Balance sheet woes behind!
The company has been gradually cleaning up its balance sheet and post the
recent USD750m QIP issue and several divestments done earlier, the company's
net automotive debt stands at INR200bn, bringing the net automotive leverage
down from 4.0x to 1.16x.
Valuation and outlook
Clearly, the key factors in Tata Motors (JLR, CVs, and leverage - in that order)
are now on a favourable footing. While the domestic car division is on shaky
grounds, the contribution of the same to the consolidated entity is negligible
(~7%). We recommend a BUY with an SOTP-based target price of INR1,570,
which values the standalone business at INR595, JLR at INR880 and other
subsidiaries at INR94 per share. Our target price provides 20% upside from
the current levels.
JLR - The key driver!
JLR has witnessed a phenomenal recovery and we reckon that the stellar performance
will continue. On the volumes front, we expect JLR to maintain the strong momentum
driven by the positive response to its newer products coupled with increasing demand
for luxury cars from emerging markets. The gap between the wholesale dispatches
and the retail sales has come down post the inventory check over the last few quarters
and consequently inventory levels (company + dealer) now stands at around 80 days
as against 160 days two years back. Wholesale dispatches are now expected to
move in tandem with the retail sales.
On the margins front, 2QFY11 saw a margin expansion of 111bps QoQ despite
currency being sequentially unfavorable in 2QFY11 (USD depreciation/Euro
appreciation vis-à-vis GBP). This was driven by a better product mix (7% QoQ realisation
growth due to higher contribution of the Jag XJ and high-end Range Rover variants)
coupled with adequate forex hedges and cost-cutting initiatives across all cost-items.
Barring any negative surprise on the currency front, we expect EBIDTA margins to
sustain above the 16% mark as the cost-cutting programme gains traction - the full
benefit of which would accrue over the next few quarters.
Beneficiary from strong CV cycle
The demand drivers for the company's CV business are stronger than ever given its
high co-relation with uptick in industrial activities. The Indian CV industry has witnessed
a domestic volumes growth of 16% CAGR over FY03-10. Roads are still the most
preferred mode of transport with approximately 85% of passenger movement and
65% of goods movement in the country happening via road. Uptick in industrial
production has kept freight movement extremely buoyant and brought back the pricing
power with the freight operators.
Testimony to this is the fact that the last diesel price hike post the budget (of INR2.6/
litre) was completely passed on. Diesel accounts for almost 60% of a transporter's
total cost, therefore, a 5% increase in diesel, increased freight rates by approximately
3%. Given the buoyancy in industrial production and consequent buoyancy in freight
movement, we expect any further increase in fuel prices to be easily passed on by the
freight operators. Tata Motors has maintained its dominance in CVs and is the biggest
beneficiary from this buoyancy in the industry with its market share consistently above
the 60% mark.
Balance sheet getting cleaned up!
The company has been gradually cleaning up its balance sheet and post the recent
USD750m QIP issue and several divestments done earlier, the company's net automotive
debt stands at INR200bn, bringing the net automotive leverage down from 4.0x to
1.16x. With a cleaner balance sheet and turnaround in operations the company is all
geared up to take advantage of the opportunities ahead.
Valuation and outlook
Clearly, the key factors in Tata Motors (JLR, CVs, and leverage - in that order) are now
on a favourable footing. While the domestic car division is on shaky grounds, the
contribution of the same to the consolidated entity is negligible (around 7%). We
recommend a BUY with an SOTP-based TP of INR1,570, which values the standalone
business at INR595, JLR at INR880 and other subsidiaries at INR94 per share. Our
target price provides a 20% upside from the current levels.
No comments:
Post a Comment