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Tata Motors (TAMO.BO)
3Q: JLR + Domestic Business Report Robust Results
3Q domestic EBITDA had a healthy beat — at Rs11.96bn (in line with CIRA
estimate) but 11% ahead of consensus. PAT at Rs4.1bn was marginally above
consensus but missed CIRA estimate by 20% on lower other income/FX losses.
EBITDA margins at 10.4% (+70bps Q/Q) bucked a weak sequential margin trend
over 1H (in line with mgmt guidance). TTMT’s results have bucked the trend of
weak margins witnessed across other OEMs this quarter.
JLR reported strong EBITDA/PAT — Overall EBITDA of GBP463m beat CIRA
estimate of GBP429m. Adjusted for currency benefits, we estimate EBITDA was
GBP436m. Margins were an impressive 17.4%, (up 80bps Q/Q). Sharp uptick in
amortization of product development expenses (GBP56m) resulted in PAT being
slightly depressed at GBP275m (GBP281m CIRA estimate). In the conference call,
mgmt noted it would strive to maintain margins at these levels. Realizations for the
Q at ~GBP42,120 were up 3.3% Q/Q, reflecting benefits of mix, favorable markets
& currency benefits. Low variable marketing spends also augmented ASPs – lower
discounting is a trend we have noticed for a while and is in line with our checks.
Balance sheet stable — Consolidated gross debt of ~Rs347bn has declined
slightly (from Rs365bn) Q/Q. Net auto debt-equity is at 0.8x (vs. 1.16x end 2Q).
Cash surplus is Rs130bn. Working capital trends stable – inventory/receivables at
~39/20 days of sales.
Conference call takeaways — Mgmt noted 1) underlying trends for CV demand
remain healthy as reflected in stable freight rates; 2) JLR margin outlook stable;
and 3) Range Rover Evoque will buttress Land Rover volumes into 2HFY12.
Maintain Buy — Key risks? 1) A slowdown in JLR sales, 2) short-term currency
oscillations that impact JLR’s profits, 3) margin pressures in the CV business and
4) a slowdown in CV sales.
3Q Results – All Round Strong Performance
3Q Results: 3 key points to note:
1) TTMT parent EBITDA was in line with our estimates, while PAT was ~20% below
due to lower other income/FX losses. This is an encouraging beat, given
lackluster performance over 1H wherein margins had disappointed. EBITDA
margin at 10.4% rose 70bps Q/Q.
2) JLR’s EBITDA of GBP463m was higher than our estimates – even adjusted for a
c2% Q/Q favorable currency movement; the adjusted EBITDA of GBP436m was
higher than our estimated GBP429m. The trend in ASPs is encouraging – at
~GBP42,200/vehicle – up ~3% Q/Q. Management noted in the conference call
that a combination of mix + favorable markets + currency drove the
improvement. PAT lagged EBITDA growth, and at GBP275m was a tad lower than
our GBP281m. The variance is attributed to a sharp uptick in product
development expenses, which at GBP56m were materially ahead of our
expectations of GBP22m. Management noted that as new models are launched,
capitalized expenses will be written off. This could have a material impact on our
FY12/13 estimates, but we have to reconfirm details with management as to
whether this quarterly number will translate into a GBP200m annualized product
development spend (all else being equal, the incremental increase would entail
an EPS cut of ~Rs17/share).
3) Debt levels marginally trend down – overall gross debt is Rs347bn (vs. Rs365bn
end 2Q). Management noted it is contemplating reducing debt levels, given cash
surplus of Rs130bn.
Conference call: Key Takeaways
1) Mgmt remains fairly sanguine on the domestic CV business – freight
rates are buoyant, CV prices were increased 1.5% in January. Macro
concerns with respect to interest rates and commodity costs continue.
2) Within JLR, Jaguar retail volumes rose ~9% Y/Y (adjusted for the fact
that the X type has been phased out), while Land Rover retail sales
rose by 11% Y/Y. Jaguar’s volumes have been impacted due to a
supply shortfall in models like the XJ, while the XF has witnessed
softening of volumes, especially in markets like China. Within the Land
Rover range, except for the Defender, other model lines like the
Freelander, Range Rover Sport and Discovery had volume growth of
18%, 17% and 16% Y/Y, respectively.
3) JLR capex is forecast at ~11-12% of revenues, with a modest upward
bias – over the past year, capex has been revised upwards from
~GBP600m to ~GBP1 billion. We think there is a slight chance this
capex amount could increase, especially if competitive intensity
escalates.
4) Product development: The next product to be launched will be the
Range Rover Evoque; this product should debut within the next 5-6
months.
Tata Motors
Valuation
Our Rs1,533 target price for Tata Motors is based on a sum-of-the-parts
valuation. We value Tata Motors' core business at Rs773/share (on a share
count of 611m shares), based on 8.5x Mar12E EV/EBITDA (rolled forward from
Dec11). We value subsidiaries and investments at Rs91/share. We attribute
around Rs670/share to JLR - we value this at 4x Mar12E EV/EBITDA, which
equates to around Rs808/share and then deduct the total net debt which
amounts to around Rs138/share. At our target price, TTMT would trade at a
consolidated price-to-book value of 4.8x / 3.1x (FY11/12E), which appears
reasonable when juxtaposed against ROEs of 45%, 38% in FY11E/12E
respectively. On a P/E basis, the stock would trade at ~10.6x and 8.2x
FY11E/12E EPS.
Risks
Our quantitative risk rating system, which tracks 260-day historical share price
volatility, suggests a Medium Risk rating for Tata Motors shares. We also assign
a Medium Risk flag, as a) the short-term debt raised to fund the JLR deal has
been refinanced, and b) the core CV business has improved sequentially from
3QFY09 lows.
The key risks that could prevent the shares from reaching our target price
emanate from: a) Weaker-than-forecast demand conditions for luxury cars and
SUVs in Europe and the US. Given the high leverage of this business to both
volumes and EPS, the key risk is if JLR volumes are lower than anticipated; b)
Our CV forecasts are predicated on our economist Rohini Malkani's view that
industrial growth should remain fairly healthy (in the 8-9% range), in both
FY11/12E. c) We assume that the credit and liquidity environment will remain
stable. A credit 'crunch' could impact consumer confidence and possibly JLR's
sales (especially in developed markets). Given TTMT's fairly leveraged balance
sheet, this is a risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Motors (TAMO.BO)
3Q: JLR + Domestic Business Report Robust Results
3Q domestic EBITDA had a healthy beat — at Rs11.96bn (in line with CIRA
estimate) but 11% ahead of consensus. PAT at Rs4.1bn was marginally above
consensus but missed CIRA estimate by 20% on lower other income/FX losses.
EBITDA margins at 10.4% (+70bps Q/Q) bucked a weak sequential margin trend
over 1H (in line with mgmt guidance). TTMT’s results have bucked the trend of
weak margins witnessed across other OEMs this quarter.
JLR reported strong EBITDA/PAT — Overall EBITDA of GBP463m beat CIRA
estimate of GBP429m. Adjusted for currency benefits, we estimate EBITDA was
GBP436m. Margins were an impressive 17.4%, (up 80bps Q/Q). Sharp uptick in
amortization of product development expenses (GBP56m) resulted in PAT being
slightly depressed at GBP275m (GBP281m CIRA estimate). In the conference call,
mgmt noted it would strive to maintain margins at these levels. Realizations for the
Q at ~GBP42,120 were up 3.3% Q/Q, reflecting benefits of mix, favorable markets
& currency benefits. Low variable marketing spends also augmented ASPs – lower
discounting is a trend we have noticed for a while and is in line with our checks.
Balance sheet stable — Consolidated gross debt of ~Rs347bn has declined
slightly (from Rs365bn) Q/Q. Net auto debt-equity is at 0.8x (vs. 1.16x end 2Q).
Cash surplus is Rs130bn. Working capital trends stable – inventory/receivables at
~39/20 days of sales.
Conference call takeaways — Mgmt noted 1) underlying trends for CV demand
remain healthy as reflected in stable freight rates; 2) JLR margin outlook stable;
and 3) Range Rover Evoque will buttress Land Rover volumes into 2HFY12.
Maintain Buy — Key risks? 1) A slowdown in JLR sales, 2) short-term currency
oscillations that impact JLR’s profits, 3) margin pressures in the CV business and
4) a slowdown in CV sales.
3Q Results – All Round Strong Performance
3Q Results: 3 key points to note:
1) TTMT parent EBITDA was in line with our estimates, while PAT was ~20% below
due to lower other income/FX losses. This is an encouraging beat, given
lackluster performance over 1H wherein margins had disappointed. EBITDA
margin at 10.4% rose 70bps Q/Q.
2) JLR’s EBITDA of GBP463m was higher than our estimates – even adjusted for a
c2% Q/Q favorable currency movement; the adjusted EBITDA of GBP436m was
higher than our estimated GBP429m. The trend in ASPs is encouraging – at
~GBP42,200/vehicle – up ~3% Q/Q. Management noted in the conference call
that a combination of mix + favorable markets + currency drove the
improvement. PAT lagged EBITDA growth, and at GBP275m was a tad lower than
our GBP281m. The variance is attributed to a sharp uptick in product
development expenses, which at GBP56m were materially ahead of our
expectations of GBP22m. Management noted that as new models are launched,
capitalized expenses will be written off. This could have a material impact on our
FY12/13 estimates, but we have to reconfirm details with management as to
whether this quarterly number will translate into a GBP200m annualized product
development spend (all else being equal, the incremental increase would entail
an EPS cut of ~Rs17/share).
3) Debt levels marginally trend down – overall gross debt is Rs347bn (vs. Rs365bn
end 2Q). Management noted it is contemplating reducing debt levels, given cash
surplus of Rs130bn.
Conference call: Key Takeaways
1) Mgmt remains fairly sanguine on the domestic CV business – freight
rates are buoyant, CV prices were increased 1.5% in January. Macro
concerns with respect to interest rates and commodity costs continue.
2) Within JLR, Jaguar retail volumes rose ~9% Y/Y (adjusted for the fact
that the X type has been phased out), while Land Rover retail sales
rose by 11% Y/Y. Jaguar’s volumes have been impacted due to a
supply shortfall in models like the XJ, while the XF has witnessed
softening of volumes, especially in markets like China. Within the Land
Rover range, except for the Defender, other model lines like the
Freelander, Range Rover Sport and Discovery had volume growth of
18%, 17% and 16% Y/Y, respectively.
3) JLR capex is forecast at ~11-12% of revenues, with a modest upward
bias – over the past year, capex has been revised upwards from
~GBP600m to ~GBP1 billion. We think there is a slight chance this
capex amount could increase, especially if competitive intensity
escalates.
4) Product development: The next product to be launched will be the
Range Rover Evoque; this product should debut within the next 5-6
months.
Tata Motors
Valuation
Our Rs1,533 target price for Tata Motors is based on a sum-of-the-parts
valuation. We value Tata Motors' core business at Rs773/share (on a share
count of 611m shares), based on 8.5x Mar12E EV/EBITDA (rolled forward from
Dec11). We value subsidiaries and investments at Rs91/share. We attribute
around Rs670/share to JLR - we value this at 4x Mar12E EV/EBITDA, which
equates to around Rs808/share and then deduct the total net debt which
amounts to around Rs138/share. At our target price, TTMT would trade at a
consolidated price-to-book value of 4.8x / 3.1x (FY11/12E), which appears
reasonable when juxtaposed against ROEs of 45%, 38% in FY11E/12E
respectively. On a P/E basis, the stock would trade at ~10.6x and 8.2x
FY11E/12E EPS.
Risks
Our quantitative risk rating system, which tracks 260-day historical share price
volatility, suggests a Medium Risk rating for Tata Motors shares. We also assign
a Medium Risk flag, as a) the short-term debt raised to fund the JLR deal has
been refinanced, and b) the core CV business has improved sequentially from
3QFY09 lows.
The key risks that could prevent the shares from reaching our target price
emanate from: a) Weaker-than-forecast demand conditions for luxury cars and
SUVs in Europe and the US. Given the high leverage of this business to both
volumes and EPS, the key risk is if JLR volumes are lower than anticipated; b)
Our CV forecasts are predicated on our economist Rohini Malkani's view that
industrial growth should remain fairly healthy (in the 8-9% range), in both
FY11/12E. c) We assume that the credit and liquidity environment will remain
stable. A credit 'crunch' could impact consumer confidence and possibly JLR's
sales (especially in developed markets). Given TTMT's fairly leveraged balance
sheet, this is a risk.
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