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Tata Motors - Now, A Global Story
We prefer four wheelers to two wheelers in the auto sector considering
competition and margin dynamics. Tata Motors is our preferred pick in
the auto sector and despite significant share price outperformance, we
maintain our BUY recommendation (27% upside) given an upward bias
to our earnings estimates and attractive forward valuations at 7.6x P/E
and 4.9x EV/EBITDA.
Key Investment Drivers
Jaguar Land Rover’s (JLR) business performance continues to
remain encouraging (2QFY11 YoY revenue growth of 58%) and we
expect new launches in CY11 to help sustain this trend. Whilst the outlook
for the European market is somewhat sluggish, we expect healthy sales
growth trend in North America and other Emerging markets. JLR’s entry
into the smaller premium range of vehicles is also positive from a portfolio
perspective. JLR’s global peers too have benefitted from this upswing in
demand, and on an aggregate basis, the key luxury car majors (BMW,
Audi and Porsche) reported 36% share price gains in 4QCY10.
JLR’s margin increase in 2QFY11 (EBITDA margin of 16.6%) was primarily
supported by an improved product mix which includes the XJ series. We
expect JLR’s operating margins to sustain at current levels despite
expected raw material cost increases, as pricing will see some
improvement with 2011 launches and reduction in warranty expenses,
which are currently above the industry average at 4-5% of sales.
Domestic commercial vehicle (CV) business performance of the
company has been encouraging (9M FY11 volume growth of 24%)
and considering trends in IIP and infrastructure investment, we expect the
CV cycle to remain healthy for at least two more years. Although increase
in fuel and commodity prices have increased the risks, underlying demand
trends still remain healthy minimizing the impact of these challenges.
Whilst domestic business performance has been somewhat disappointing
on the margin front (single digit margins), we expect these trends to see
improvement with the recent price increase (approximately 1-3%)
announced by the company at beginning of 3QFY11, encouraging mix
and overall demand trends.
Valuation, Recommendation and Outlook
We recommend a BUY with an SOTP-based target price of Rs1,600 implying
27% upside. We value the standalone business at Rs579/sh (8x FY12
EV/EBITDA), JLR at Rs921/sh (6x FY12 EV/EBITDA) and other key subsidiaries
at Rs100/sh. On a consolidated basis, we expect the company to report 20%
topline growth and 86% earnings growth for FY10-12. The stock is currently
trading at a P/E multiple of 7.6x and EV/EBITDA multiple of 4.9x on our FY12
estimates implying more than 25% discount to historical and peer averages.
Key risks to our BUY stance and fair value: Significant decline in
consumer confidence, significant increase in interest rates could adversely
impact volumes. Further sharp rise in commodity prices could negatively
impact margins.
Tata Motors is the largest commercial vehicle
manufacturer in the domestic market with over 60%
market share. The company has a significant presence
in the utility vehicle and passenger car segment as well.
With the acquisition of JLR, the company has become a
full fledged global car company. Based on its strong
engineering and product development capabilities, Tata
Motors has been able to introduce innovative products
such as the ACE, and more recently, the Nano.
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