Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Motors
Risk Rewards Looks
Attractive; Remain OW
What's Changed
Price Target Rs1,438.00 to Rs1,345.00
F12 /F13 EPS By +1% / +2%/ -2%
F3Q11 earnings review. Tata Motors reported F3Q
results, with revenue, EBITDA and adjusted net income
growth of 22%, 58% and 177% YoY, respectively. These
were 10% ahead of our estimates. The India business,
now 33% of EBIT, reported sequential EBITDA margin
expansion with EBITDA of Rs11.9bn, and margins at
10.4%, up 70 bps QoQ. JLR continued to surprise
positively with EBITDA margin of 17.4%, up 80bps QoQ
and net income of GBP275 mn, up 16% QoQ. Overall
net income (adjusted for one-time gain of Rs300 mn)
was Rs24.2 bn, up 2.7x YoY.
• Key Positives: Sequential EBITDA
improvement in both India and JLR businesses.
Group net automotive debt to equity came
down to 0.8x.
• Key Negatives: Lowering financial disclosures
on JLR. Given the complex nature of JLR’s
business, the company’s decision to reduce
financial disclosures lowers earnings visibility
thus limits multiple re-rating.
Outlook: We marginally revise our earnings but lower
our price target by 6% as we reduce our target multiples.
For the Indian CV cycle macro, the outlook is turning
adverse, so we lower our target EV/EBITDA from 9x
F2012 to 8x, in line with the historical median. JLR
remains strong but we lower our target EV/EBITDA from
5x F2012 to 4.5x as some key markets like China are
potentially peaking in terms of growth. At 8x F2012 EPS
and 4.4x F2012 EV/EBITDA, we believe the risk/reward
is attractive, and we remain Overweight.
Investment Case
JLR shines; India business profitability improves
sequentially. Tata Motors reported another strong quarter
with adjusted net income of Rs24 bn, 10% ahead of our
estimate. Given attractive valuations versus its peers and
potential upside from JLR maintaining margins, we remain
Overweight on Tata Motors. Further to our post results note
on Tata Motors dated February 11, First Cut, F3Q11; Beat
Estimates, we attended the JLR conference call and below
is our analysis of the result.
JLR: Another strong quarter. JLR reported strong
numbers with revenue at GBP2.6bn as realizations rose
3.3% QoQ. EBITDA margins reached a new high and came
in at 17.4% in F3Q11 vs 16.6% in F2Q11. Non cash
depreciation expense rose, thus EBIT margins came at
10.9%, down 70 bps QoQ.
Going forward, the company will not report a breakdown of
operational costs (split between material cost, staff and
other expenses), thus limiting our results analysis and also
lowering visibility on a key and a complex portion of
business; i.e., JLR. In the conference call management
pointed that key reasons for margin surprise at JLR are:
Improved regional mix. Growth in high profit margin
markets like China and North America offset slowing
volume growth in highly competitive and low margin
markets like Europe. We note that in F3Q11 the share of
China rose to 13% from 10% in the prior quarter.
Incentives reduced. As volume growth picks up,
incentives move down. Given strong demand and capacity
constraints, JLR models have a 2 to 6 week wait, thus
allowing the company to reduce incentives. In the US we
have seen a sharp 25–40% sequential drop in incentives for
JLR and we believe a similar trend may have played out
globally.
Forex partially hedged. Currency movement plays a major
role in JLR’s margins as 50% of the top line is
US$ denominated and 25–30% of expenses are in €. In
F3Q10, the US$ depreciated by 2% against Gbp, and the €
appreciated by 3% against the Gbp; thus forex movement
at the margin was adverse but the company was partially
hedged and gained favorably. For F4Q11 to date, forex
movement is positive as the € is again depreciating and the
company is partially hedged for the quarter.
For F2012, it is difficult to project impact of forex on margins
as there is limited information on amount, tenor and rate at
which JLR hedges its revenue and expenses, leading us to
be conservative on the margin outlook. We forecast F2012
margins at 15.9%, about 150 bps lower than F3Q11 run
rate.
Volumes, mix improved: Volumes were up 15% QoQ and
share of high margin Land Rover range rose from 74% in
F2Q11 to 79% in F3Q11.
JLR: Retail sales were 58.3k, up 6% YoY and wholesale
was 63k, up 11%. Wholesale was 8% higher than retail as
the company started building inventory ahead of 2011
model sales. On the retail sales side, LR, 79% of portfolio,
was up 11% YoY, but Jaguar was down 11%. Within the
Land Rover portfolio all models, except Defender, had
strong growth with Freelander, Ranger Rover Sport and
Discovery models up 18%, 17% and 16% YoY, respectively.
On the Jaguar side while XJ continues to do well, XF
demand is slowing.
India business: Operational improvement is positive.
India posted net income, EBITDA and net income growth of
28%, 4% and 4% YoY (Exhibit 18), respectively. The
volume mix was favorable and overall volume was up 15%
YoY and down 7% QoQ. ASPs expanded an impressive 8%
QoQ as MHCV and LCV mix share rose, and also reflected
price hikes taken. Gross margin improved 95 bps QoQ to
30% as share of LCVs in mix rose from 29% in 2Q to 34% in
3Q. The company highlighted that demand momentum is
healthy but cost pressures are a concern; thus, we expect
14% CV growth in F2012 (Exhibit 10) and margins to
contract from 10.4% in the current quarter to 9.5% in F2012.
Key takeaways from the Conference Call
India business demand outlook is healthy: Management
continues to expect healthy demand growth for India
business and cited that post emission change and
corresponding price hikes, volumes have held on much
better than they anticipated. Incrementally though, costs
are going up (interest rates, CV prices) while operator
profitability is healthy as freight demand is high and freight
rates are going up; thus, the overall environment remains
favorable.
Margins for India business will be under pressure in 4Q
amid a rising commodity price environment. The company
took a price hike of 1% to 1.5% in early F3Q11, and another
price hike of similar amount at the beginning of F4Q11. Raw
material costs for the current quarter are mostly hedged.
On the Nano: In F3Q11, Nano sales were open in 12 states
and in January sales have opened pan-India. According to
management Nano is clocking 10,000 units run-rate.
JLR faces certain supply constraints and most will be
soon resolved. Current capacity for JLR is about 300k units,
and management will at assembling operations in India and
China to augment future capacity growth. JLR did a capex
and R&D spend of Gbp172mn in 3Q.
Net automotive debt/equity stood at 0.8x as on December
31, 2010, vs 1.73 as on September 30, 2010. Gross debt
was at Rs340bn, net debt at Rs210bn and net automotive
debt of Rs150 bn. Cash profit for the group came in at Rs35
bn, up 8% QoQ.
Group capex: Management maintained guidance on
capex of Rs25-30bn for TAMO standalone and
GBP800mn-1bn for JLR annually. The South Africa plant
will be ready by F1Q12 and Dharwad plant will be ready by
F1Q12.
Base case of Rs1,345 (Rs1438 prior) is also our price
target
We base our scenarios on volume and profitability
assumptions for JLR and Tata Motors CV’s business.
We assume 20% and 12% growth in MHCVs in F2011 and
F2012, respectively. Moderating CV growth in India lowers
pricing power, thus the company absorbs some of the inflation
related costs, and EBITDA margins fall to 9.5% in FY12 vs
10.4% in F3Q11. We lower India business target multiple to 8x
FY12, in line with the historical median.
We expect JLR to post sales of 240K units sales in F2011 and
275k units in F2012. Though the company posted an all time
high EBITDA margin of 17.4%, we set FY12 margins at 15.9%,
150 bps lower than F3Q11 as we have limited information on
currency benefits (could range between 100 bps to 150 bps)
included in current margins and future hedging plans. Given
JLR is at a high margin and some key markets like China are
peaking in terms of growth, we lower our target EV/EBITDA to
4.5x FY12 vs 5x earlier. As Exhibit 13 shows, the historical
median EV/EBITDA of EU OEM is 4x, thus, we continue to
believe that JLR deserves a premium given its superior earning
and growth profile. Exhibit 14 also shows our price target
across various multiples.
We value Tata Motors on a sum-of-the-parts basis and arrive at
a price target of Rs1,345 (18% upside from current levels).
Bull Case Rs1,536 (versus Rs1,574 previously)
JLR volumes at 300k in FY12: Our base case
assumptions imply 35k units addition in JLR volume in
F2012 (from 240k to 275k); in FY12 LR enters a new
segment of small SUVs (Evoque) and if the product is
successful, this could add a further 25k units to FY12
volumes, leading to a total of 300k units for the year.
Management guides that while Evoque will be cheaper than
current Land Rovers, it would not be margin dilutive,
implying that Eqvoque’s success could lead to strong
absolute EBITDA growth. On 300k units and 4% ASP
contraction in F2012 (lower priced Evoque addition), we
reach an EBITDA of Gbp2bn, 8% higher than F3Q11 run
rate annualized. These assumptions lead to a further 10%
upside to our base case price target of Rs1,345.
India Business: Volume Growth Drives Earnings:
Inflation pressures continue and EBITDA margins remain at
base case levels of 9.5% for F2012, but aggressive push by
the government to encourage industrial growth pushes
MHCV sales growth to 18% for F2012. Thus absolute
EBITDA goes to Rs51.5 bn. Volume growth leads to
multiple expansion from 8x F2012 EV/EBITDA in our base
case to 8.5x in our bull case. Taking into account
assumptions for both JLR and India business we arrive at
our bull case value of Rs1,536.
Bear Case Rs984 (Rs1,002 previously)
India business drags overall growth. High inflation, slowing
economic growth and tight liquidity drives MHCV volumes
down 10% in F2012, India business EBITDA falls to Rs40 bn,
down 10% YoY, and adverse growth outlook de-rates the India
business to 7x EV/EBITDA, the lower end of multiple curve.
These assumptions brings us closer to Rs1,100 levels.
We further assume that JLR posts no volume growth in F2012
and EBITDA falls to Gbp1400 mn, 24% lower than F3Q11
run-rate, owing to increasing competitive pricing. Both
assumptions lead to our bear case value of Rs984.
Investment Thesis
• JLR, 67% of group EBIT, is well
poised to benefit from the strong
growth in luxury car market. Aided by
strong volume, favorable product and
regional mix, we expect JLR to post
£1,8 bn in EBITDA in FY12.
• India business posted sequential
margin expansion but rising rates
and high inflation make us cautious
on future growth. While we maintain
12% MHCV growth outlook but lower
FY12 EBITDA margin to 9.5% vs
10.4% in F3Q11.
• We value the stock on a sum-of-the-
parts basis and value the JLR and
India business at Rs1,193 per share
and other businesses at Rs157 per
share, thus reaching our price target
of Rs1,345.
Key Value Drivers
• JLR volume/earnings will be the key
driver.
• Indian MHCV volumes growth.
Key Catalysts
• Indian CV post better than expected
volumes.
• JLR volumes improve with
successful launch of Evoque,
targeted in May11.
• Tata Motors starts unlocking
subsidiary value (Tata Motors
Finance) by stake sales.
Key Risks
• Double-dip recession results in
decline in global luxury car market/
JLR sales.
• India CV volumes come off in FY12 as
the macro recovery is slower than
anticipated.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Motors
Risk Rewards Looks
Attractive; Remain OW
What's Changed
Price Target Rs1,438.00 to Rs1,345.00
F12 /F13 EPS By +1% / +2%/ -2%
F3Q11 earnings review. Tata Motors reported F3Q
results, with revenue, EBITDA and adjusted net income
growth of 22%, 58% and 177% YoY, respectively. These
were 10% ahead of our estimates. The India business,
now 33% of EBIT, reported sequential EBITDA margin
expansion with EBITDA of Rs11.9bn, and margins at
10.4%, up 70 bps QoQ. JLR continued to surprise
positively with EBITDA margin of 17.4%, up 80bps QoQ
and net income of GBP275 mn, up 16% QoQ. Overall
net income (adjusted for one-time gain of Rs300 mn)
was Rs24.2 bn, up 2.7x YoY.
• Key Positives: Sequential EBITDA
improvement in both India and JLR businesses.
Group net automotive debt to equity came
down to 0.8x.
• Key Negatives: Lowering financial disclosures
on JLR. Given the complex nature of JLR’s
business, the company’s decision to reduce
financial disclosures lowers earnings visibility
thus limits multiple re-rating.
Outlook: We marginally revise our earnings but lower
our price target by 6% as we reduce our target multiples.
For the Indian CV cycle macro, the outlook is turning
adverse, so we lower our target EV/EBITDA from 9x
F2012 to 8x, in line with the historical median. JLR
remains strong but we lower our target EV/EBITDA from
5x F2012 to 4.5x as some key markets like China are
potentially peaking in terms of growth. At 8x F2012 EPS
and 4.4x F2012 EV/EBITDA, we believe the risk/reward
is attractive, and we remain Overweight.
Investment Case
JLR shines; India business profitability improves
sequentially. Tata Motors reported another strong quarter
with adjusted net income of Rs24 bn, 10% ahead of our
estimate. Given attractive valuations versus its peers and
potential upside from JLR maintaining margins, we remain
Overweight on Tata Motors. Further to our post results note
on Tata Motors dated February 11, First Cut, F3Q11; Beat
Estimates, we attended the JLR conference call and below
is our analysis of the result.
JLR: Another strong quarter. JLR reported strong
numbers with revenue at GBP2.6bn as realizations rose
3.3% QoQ. EBITDA margins reached a new high and came
in at 17.4% in F3Q11 vs 16.6% in F2Q11. Non cash
depreciation expense rose, thus EBIT margins came at
10.9%, down 70 bps QoQ.
Going forward, the company will not report a breakdown of
operational costs (split between material cost, staff and
other expenses), thus limiting our results analysis and also
lowering visibility on a key and a complex portion of
business; i.e., JLR. In the conference call management
pointed that key reasons for margin surprise at JLR are:
Improved regional mix. Growth in high profit margin
markets like China and North America offset slowing
volume growth in highly competitive and low margin
markets like Europe. We note that in F3Q11 the share of
China rose to 13% from 10% in the prior quarter.
Incentives reduced. As volume growth picks up,
incentives move down. Given strong demand and capacity
constraints, JLR models have a 2 to 6 week wait, thus
allowing the company to reduce incentives. In the US we
have seen a sharp 25–40% sequential drop in incentives for
JLR and we believe a similar trend may have played out
globally.
Forex partially hedged. Currency movement plays a major
role in JLR’s margins as 50% of the top line is
US$ denominated and 25–30% of expenses are in €. In
F3Q10, the US$ depreciated by 2% against Gbp, and the €
appreciated by 3% against the Gbp; thus forex movement
at the margin was adverse but the company was partially
hedged and gained favorably. For F4Q11 to date, forex
movement is positive as the € is again depreciating and the
company is partially hedged for the quarter.
For F2012, it is difficult to project impact of forex on margins
as there is limited information on amount, tenor and rate at
which JLR hedges its revenue and expenses, leading us to
be conservative on the margin outlook. We forecast F2012
margins at 15.9%, about 150 bps lower than F3Q11 run
rate.
Volumes, mix improved: Volumes were up 15% QoQ and
share of high margin Land Rover range rose from 74% in
F2Q11 to 79% in F3Q11.
JLR: Retail sales were 58.3k, up 6% YoY and wholesale
was 63k, up 11%. Wholesale was 8% higher than retail as
the company started building inventory ahead of 2011
model sales. On the retail sales side, LR, 79% of portfolio,
was up 11% YoY, but Jaguar was down 11%. Within the
Land Rover portfolio all models, except Defender, had
strong growth with Freelander, Ranger Rover Sport and
Discovery models up 18%, 17% and 16% YoY, respectively.
On the Jaguar side while XJ continues to do well, XF
demand is slowing.
India business: Operational improvement is positive.
India posted net income, EBITDA and net income growth of
28%, 4% and 4% YoY (Exhibit 18), respectively. The
volume mix was favorable and overall volume was up 15%
YoY and down 7% QoQ. ASPs expanded an impressive 8%
QoQ as MHCV and LCV mix share rose, and also reflected
price hikes taken. Gross margin improved 95 bps QoQ to
30% as share of LCVs in mix rose from 29% in 2Q to 34% in
3Q. The company highlighted that demand momentum is
healthy but cost pressures are a concern; thus, we expect
14% CV growth in F2012 (Exhibit 10) and margins to
contract from 10.4% in the current quarter to 9.5% in F2012.
Key takeaways from the Conference Call
India business demand outlook is healthy: Management
continues to expect healthy demand growth for India
business and cited that post emission change and
corresponding price hikes, volumes have held on much
better than they anticipated. Incrementally though, costs
are going up (interest rates, CV prices) while operator
profitability is healthy as freight demand is high and freight
rates are going up; thus, the overall environment remains
favorable.
Margins for India business will be under pressure in 4Q
amid a rising commodity price environment. The company
took a price hike of 1% to 1.5% in early F3Q11, and another
price hike of similar amount at the beginning of F4Q11. Raw
material costs for the current quarter are mostly hedged.
On the Nano: In F3Q11, Nano sales were open in 12 states
and in January sales have opened pan-India. According to
management Nano is clocking 10,000 units run-rate.
JLR faces certain supply constraints and most will be
soon resolved. Current capacity for JLR is about 300k units,
and management will at assembling operations in India and
China to augment future capacity growth. JLR did a capex
and R&D spend of Gbp172mn in 3Q.
Net automotive debt/equity stood at 0.8x as on December
31, 2010, vs 1.73 as on September 30, 2010. Gross debt
was at Rs340bn, net debt at Rs210bn and net automotive
debt of Rs150 bn. Cash profit for the group came in at Rs35
bn, up 8% QoQ.
Group capex: Management maintained guidance on
capex of Rs25-30bn for TAMO standalone and
GBP800mn-1bn for JLR annually. The South Africa plant
will be ready by F1Q12 and Dharwad plant will be ready by
F1Q12.
Base case of Rs1,345 (Rs1438 prior) is also our price
target
We base our scenarios on volume and profitability
assumptions for JLR and Tata Motors CV’s business.
We assume 20% and 12% growth in MHCVs in F2011 and
F2012, respectively. Moderating CV growth in India lowers
pricing power, thus the company absorbs some of the inflation
related costs, and EBITDA margins fall to 9.5% in FY12 vs
10.4% in F3Q11. We lower India business target multiple to 8x
FY12, in line with the historical median.
We expect JLR to post sales of 240K units sales in F2011 and
275k units in F2012. Though the company posted an all time
high EBITDA margin of 17.4%, we set FY12 margins at 15.9%,
150 bps lower than F3Q11 as we have limited information on
currency benefits (could range between 100 bps to 150 bps)
included in current margins and future hedging plans. Given
JLR is at a high margin and some key markets like China are
peaking in terms of growth, we lower our target EV/EBITDA to
4.5x FY12 vs 5x earlier. As Exhibit 13 shows, the historical
median EV/EBITDA of EU OEM is 4x, thus, we continue to
believe that JLR deserves a premium given its superior earning
and growth profile. Exhibit 14 also shows our price target
across various multiples.
We value Tata Motors on a sum-of-the-parts basis and arrive at
a price target of Rs1,345 (18% upside from current levels).
Bull Case Rs1,536 (versus Rs1,574 previously)
JLR volumes at 300k in FY12: Our base case
assumptions imply 35k units addition in JLR volume in
F2012 (from 240k to 275k); in FY12 LR enters a new
segment of small SUVs (Evoque) and if the product is
successful, this could add a further 25k units to FY12
volumes, leading to a total of 300k units for the year.
Management guides that while Evoque will be cheaper than
current Land Rovers, it would not be margin dilutive,
implying that Eqvoque’s success could lead to strong
absolute EBITDA growth. On 300k units and 4% ASP
contraction in F2012 (lower priced Evoque addition), we
reach an EBITDA of Gbp2bn, 8% higher than F3Q11 run
rate annualized. These assumptions lead to a further 10%
upside to our base case price target of Rs1,345.
India Business: Volume Growth Drives Earnings:
Inflation pressures continue and EBITDA margins remain at
base case levels of 9.5% for F2012, but aggressive push by
the government to encourage industrial growth pushes
MHCV sales growth to 18% for F2012. Thus absolute
EBITDA goes to Rs51.5 bn. Volume growth leads to
multiple expansion from 8x F2012 EV/EBITDA in our base
case to 8.5x in our bull case. Taking into account
assumptions for both JLR and India business we arrive at
our bull case value of Rs1,536.
Bear Case Rs984 (Rs1,002 previously)
India business drags overall growth. High inflation, slowing
economic growth and tight liquidity drives MHCV volumes
down 10% in F2012, India business EBITDA falls to Rs40 bn,
down 10% YoY, and adverse growth outlook de-rates the India
business to 7x EV/EBITDA, the lower end of multiple curve.
These assumptions brings us closer to Rs1,100 levels.
We further assume that JLR posts no volume growth in F2012
and EBITDA falls to Gbp1400 mn, 24% lower than F3Q11
run-rate, owing to increasing competitive pricing. Both
assumptions lead to our bear case value of Rs984.
Investment Thesis
• JLR, 67% of group EBIT, is well
poised to benefit from the strong
growth in luxury car market. Aided by
strong volume, favorable product and
regional mix, we expect JLR to post
£1,8 bn in EBITDA in FY12.
• India business posted sequential
margin expansion but rising rates
and high inflation make us cautious
on future growth. While we maintain
12% MHCV growth outlook but lower
FY12 EBITDA margin to 9.5% vs
10.4% in F3Q11.
• We value the stock on a sum-of-the-
parts basis and value the JLR and
India business at Rs1,193 per share
and other businesses at Rs157 per
share, thus reaching our price target
of Rs1,345.
Key Value Drivers
• JLR volume/earnings will be the key
driver.
• Indian MHCV volumes growth.
Key Catalysts
• Indian CV post better than expected
volumes.
• JLR volumes improve with
successful launch of Evoque,
targeted in May11.
• Tata Motors starts unlocking
subsidiary value (Tata Motors
Finance) by stake sales.
Key Risks
• Double-dip recession results in
decline in global luxury car market/
JLR sales.
• India CV volumes come off in FY12 as
the macro recovery is slower than
anticipated.
No comments:
Post a Comment