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UBS Investment Research
Tata Motors Ltd.
Jaguarnaut rolls on, upgrade to Buy
„ Expect another beat to expectations in Q3
We upgrade Tata Motors to a Buy rating from Neutral as we expect JLR margins
to improve further in Q3FY11 due to improving product mix (more Land Rovers),
reduction in incentives and operating leverage to negate our concerns on currency
effect and potentially higher RM cost. We are now 10% ahead of cons. for FY11
PAT. We expect Q3FY11 PAT of Rs 25bn up 13% QoQ. We raise our price target
to Rs 1,500 (from Rs.1,300) on the back of our earnings upgrade.
„ We believe valuations are attractive at 7.5x FY12 EPS estimate
The stock has corrected 11% in the last month, we believe, on concerns of a
domestic slowdown and has underperformed other EU premium car manufacturers
by ~20% in the last 3 months. We believe JLR will benefit in case of continued
global recovery (JLR contributes ~65% of Tata Motors EBITDA). The valuations
remain undemanding despite our estimates incorporating a domestic slowdown in
demand.
„ Remain modest in growth expectations, reducing standalone estimates
We expect JLR volumes to grow 11% in FY12 vs. no growth earlier helped by
improving global outlook. We are however reducing our growth and margin
expectations for the domestic business. We raise our EPS for FY11/12/13 from
113.65/120.53/133.54 to 143.48/159.28/170.53 driven by higher JLR earnings.
„ Valuation: Upgrade to Buy (from Neutral), Raise PT to Rs 1,500
We continue to value the company on a sum-of-the-parts basis. We cut our
multiple for the domestic business from 10x EBITDA to 9x. We maintain our JLR
EV/EBITDA multiple of 5x.
Upgrading to Buy, Raising PT to
Rs 1,500
We upgrade Tata Motors to Buy
1) Our previous downgrade of the stock to Neutral in Oct’10 was driven
by peaking margins at JLR and more cautious growth outlook for
volumes, which we believe has proved to be too early.
2) We upgrade the stock to a Buy as we expect JLR margins and earnings
in Q3FY11 to surprise on the upside. We expect margins to expand
further in Q3FY11 driven by improving mix, decline in incentives and
operating leverage to overcome currency and commodity cost
headwinds.
3) We are 10%/5% ahead of consensus for FY11/12 earnings following
our earnings upgrade despite incorporating a domestic slowdown.
4) JLR will contribute 65% of FY11 EBITDA for Tata Motors. JLR
remains significantly levered to improving demand outlook in case of a
stronger global recovery.
5) We believe valuations are undemanding and inline with global peers.
The stock has however significantly underperformed global auto peers
and other EU premium car manufacturers over the last 3 months despite
strong Q2FY11 margins.
6) We raise our PT to Rs 1,500 from Rs 1,300 driven by our upgrade to
JLR earnings while we reduce domestic earnings assuming slower
volume growth and higher margin pressure for the domestic business.
We also reduce our valuation multiple from 10x to 9x for the domestic
business given a more cautious outlook for domestic growth.
Q3FY11 Results Preview
JLR to drive strong earnings growth
Q We expect Q3FY11 earnings for Tata Motors to surprise on the upside
driven by strong margins at JLR. We expect EBITDA to grow 12.6% qoq
driven by strong 17% qoq EBITDA growth at JLR.
Q Currency has moved negatively for JLR this qtr, given appreciation of the
EUR vs GBP and GBP vs USD. Also, we expect RM cost to increase due to
reset of commodity prices from H2FY11.
Q However, we expect these to be offset by lower incentives on a sequential
basis as well as improved mix. Given, constraints on engine supply from
Ford, JLR has allocated the engines towards the higher margin Land Rover
product range. Share of Jaguar has declined sequentially from 26% in
Q2FY11 to 21% in Q3FY11.
Q This along with 15% sequential volume growth, will offset potential margin
pressure due to currency and raw material costs. We expect JLR EBITDA to
improve 40bps qoq to 17% in Q3FY11.
Q We expect standalone EBITDA to increase 6% QoQ primarily due to better
mix.
Q Tata Motors Ltd.
Tata Motors manufactures and sells commercial vehicles, utility vehicles, and
passenger cars in India. Tata Motors is the dominant player in the Indian
commercial vehicles space, with close to a 60% market share in both the
medium and heavy commercial vehicle markets in India as well as light
commercial vehicles. Tata Motors entered the passenger car market in 1998 with
the Indica model. In 2003, it released the mid-size sedan, Indigo, followed by
the Nano in 2009. In June 2008, Tata Motors acquired Jaguar and Land Rover
from Ford. The Tata Group owns 35% of Tata Motors.
Q Statement of Risk
Key risks for Tata Motors remain slowdown in CV demand in India, decline in
sales of Jaguar and Land Rover and inability to refinance debt on account of
acquisitions. Decline in demand for company's cars and LCV's remain the other
key risk.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tata Motors Ltd.
Jaguarnaut rolls on, upgrade to Buy
„ Expect another beat to expectations in Q3
We upgrade Tata Motors to a Buy rating from Neutral as we expect JLR margins
to improve further in Q3FY11 due to improving product mix (more Land Rovers),
reduction in incentives and operating leverage to negate our concerns on currency
effect and potentially higher RM cost. We are now 10% ahead of cons. for FY11
PAT. We expect Q3FY11 PAT of Rs 25bn up 13% QoQ. We raise our price target
to Rs 1,500 (from Rs.1,300) on the back of our earnings upgrade.
„ We believe valuations are attractive at 7.5x FY12 EPS estimate
The stock has corrected 11% in the last month, we believe, on concerns of a
domestic slowdown and has underperformed other EU premium car manufacturers
by ~20% in the last 3 months. We believe JLR will benefit in case of continued
global recovery (JLR contributes ~65% of Tata Motors EBITDA). The valuations
remain undemanding despite our estimates incorporating a domestic slowdown in
demand.
„ Remain modest in growth expectations, reducing standalone estimates
We expect JLR volumes to grow 11% in FY12 vs. no growth earlier helped by
improving global outlook. We are however reducing our growth and margin
expectations for the domestic business. We raise our EPS for FY11/12/13 from
113.65/120.53/133.54 to 143.48/159.28/170.53 driven by higher JLR earnings.
„ Valuation: Upgrade to Buy (from Neutral), Raise PT to Rs 1,500
We continue to value the company on a sum-of-the-parts basis. We cut our
multiple for the domestic business from 10x EBITDA to 9x. We maintain our JLR
EV/EBITDA multiple of 5x.
Upgrading to Buy, Raising PT to
Rs 1,500
We upgrade Tata Motors to Buy
1) Our previous downgrade of the stock to Neutral in Oct’10 was driven
by peaking margins at JLR and more cautious growth outlook for
volumes, which we believe has proved to be too early.
2) We upgrade the stock to a Buy as we expect JLR margins and earnings
in Q3FY11 to surprise on the upside. We expect margins to expand
further in Q3FY11 driven by improving mix, decline in incentives and
operating leverage to overcome currency and commodity cost
headwinds.
3) We are 10%/5% ahead of consensus for FY11/12 earnings following
our earnings upgrade despite incorporating a domestic slowdown.
4) JLR will contribute 65% of FY11 EBITDA for Tata Motors. JLR
remains significantly levered to improving demand outlook in case of a
stronger global recovery.
5) We believe valuations are undemanding and inline with global peers.
The stock has however significantly underperformed global auto peers
and other EU premium car manufacturers over the last 3 months despite
strong Q2FY11 margins.
6) We raise our PT to Rs 1,500 from Rs 1,300 driven by our upgrade to
JLR earnings while we reduce domestic earnings assuming slower
volume growth and higher margin pressure for the domestic business.
We also reduce our valuation multiple from 10x to 9x for the domestic
business given a more cautious outlook for domestic growth.
Q3FY11 Results Preview
JLR to drive strong earnings growth
Q We expect Q3FY11 earnings for Tata Motors to surprise on the upside
driven by strong margins at JLR. We expect EBITDA to grow 12.6% qoq
driven by strong 17% qoq EBITDA growth at JLR.
Q Currency has moved negatively for JLR this qtr, given appreciation of the
EUR vs GBP and GBP vs USD. Also, we expect RM cost to increase due to
reset of commodity prices from H2FY11.
Q However, we expect these to be offset by lower incentives on a sequential
basis as well as improved mix. Given, constraints on engine supply from
Ford, JLR has allocated the engines towards the higher margin Land Rover
product range. Share of Jaguar has declined sequentially from 26% in
Q2FY11 to 21% in Q3FY11.
Q This along with 15% sequential volume growth, will offset potential margin
pressure due to currency and raw material costs. We expect JLR EBITDA to
improve 40bps qoq to 17% in Q3FY11.
Q We expect standalone EBITDA to increase 6% QoQ primarily due to better
mix.
Q Tata Motors Ltd.
Tata Motors manufactures and sells commercial vehicles, utility vehicles, and
passenger cars in India. Tata Motors is the dominant player in the Indian
commercial vehicles space, with close to a 60% market share in both the
medium and heavy commercial vehicle markets in India as well as light
commercial vehicles. Tata Motors entered the passenger car market in 1998 with
the Indica model. In 2003, it released the mid-size sedan, Indigo, followed by
the Nano in 2009. In June 2008, Tata Motors acquired Jaguar and Land Rover
from Ford. The Tata Group owns 35% of Tata Motors.
Q Statement of Risk
Key risks for Tata Motors remain slowdown in CV demand in India, decline in
sales of Jaguar and Land Rover and inability to refinance debt on account of
acquisitions. Decline in demand for company's cars and LCV's remain the other
key risk.
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