Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Motors (TAMO.BO)
Neutral Equity Research
Trading at mid-cycle; DVR discount widens
What's changed
We continue to believe that EV-based valuation parameters are more
appropriate for Tata Motors given high financial leverage relative to peers,
and the unfolding turnaround at JLR looks priced in when evaluated on
metrics such as EV/IC, EV/Sales and EV/EBITDA. We observe that the price
differential between Tata Motors’ common shares and its DVRs
(Differential Voting Rights) has widened to Jan. 2010 levels of a discount of
43% (vs. an historical range of -45% to -10%, and average of -30%). We
note that DVRs offer similar economic rights (1/10th voting right of a
common share, 5% higher dividend) as common shares. An overview of
BSE filings since Jul. 2001 suggests very few instances of minority
shareholder opposition to resolutions proposed by management. In
examining other DVRs in India and the global auto industry, we note that
Pantaloon Retail DVR is currently trading at a 23% discount to common
(with 5% higher dividend), while Gujarat NRE Coke DVR trades at a 45%
discount (1/100th voting rights and same dividend rate).
Implications
We consider liquidity and voting rights in the context of the DVR valuation
discount; however we do not attempt to quantify an appropriate discount
in this note as we do not cover the DVR securities. We retain our Neutral
rating on the common share and FY12E EV/EBITDA-based 12-month target
price of Rs1,106, and offer some updated valuation analysis in this note.
Valuation
The common share is currently trading at a mid-cycle multiple of 5.6X
FY12E EV/EBITDA vs. DVRs at 3.9X, Indian auto coverage average at 7.3X,
3.3X for Europe and 4.6X globally.
Key risks
1) Higher-/lower-than-expected sales volume and margins at JLR; and 2) lack
of visibility of detailed financials at JLR which is a key driver of valuation.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
Trading at mid-cycle; DVR discount widens
We continue to believe that EV-based valuation parameters are more appropriate for Tata
Motors given its high financial leverage relative to peers, and we think the unfolding
turnaround at JLR looks priced in when evaluated on metrics such as EV/IC, EV/Sales and
EV/EBITDA. The common share is currently trading at a mid-cycle multiple of 5.6X FY12E
EV/EBITDA vs. DVRs at 3.9X, our Indian auto coverage average at 7.3X, 3.3X for Europe
and 4.6X globally. On Director’s Cut valuation matrix relative to global coverage, the stock
appears reasonably valued. On RoE-implied valuation relative to global coverage Tata
Motors appears under-valued, but we believe this is due to relatively high financial
leverage that results in higher RoE. Relative to India coverage Tata Motors appears undervalued
on both Director’s Cut and RoE implied valuation. We believe this is due to the fact
that more than 70% of operating profit is contributed by the European business (JLR).
Valuation multiples for European peers have historically been lower compared with
Indian companies (for example, see Exhibit 4).
We observe that the price differential between Tata Motors’ common shares and its DVRs
(Differential Voting Rights) has widened to Jan. 2010 levels of a discount of 43% (vs. an
historical range of -45% to -10%, and average of -30%). We make the following
observations:
1. DVRs offer nearly the same economic rights as common shares
Excluding voting rights (1/10th of a common share), the DVRs offer similar economic
rights to the investor, and 5% higher dividend compared with common shares. As per a
postal ballot notice filed by Tata Motors with BSE on July 15, 2008, the DVRs “issued by
the Company will enjoy all rights and privileges that are attached to Ordinary Shares in
law and by the provisions of these presents, except as to voting and/or dividend, as
provided in these Articles and as may be permitted under applicable law from time to
time” (source: BSE website; our emphasis).
2. Valuation discount: we examine voting rights and liquidity
We analyzed voting rights and liquidity in the context of the valuation discount for this
security:
(a) Voting rights – On reviewing the proceedings of Annual General Meetings and records
of significant resolutions passed at Extraordinary General Meetings or through postal
ballot since Jul. 2001 as available on the BSE website, we find very few instances of
significant shareholder opposition to resolutions proposed by the management over the
last 10 years.
(b) Liquidity – Tata Motors’ DVRs are among the top 70 stocks in terms of 3-month average
daily traded volume (US$ mn) relative to Goldman Sachs’ India coverage, with about
US$7mn daily average traded volume over the last 3 weeks. We note that its average daily
traded value is higher than or comparable to the common shares of automobile peers such
as Ashok Leyland, TVS Motors, Apollo Tyres and Bosch India. We also note that Tata
Motors’ DVRs are part of the National Stock Exchange F&O segment, where inclusion is
based on stringent market cap and average daily traded value criteria. We note that liquidity
has risen after the Oct 2010 capital raising exercise by the company when about 32mn
additional DVR shares were issued (Exhibit 2).
3. Analysis of comparable DVRs
We analyze other DVR examples in India and the global auto industry:
a) We found only two instances of Indian companies with different classes of shares -
Pantaloon Retail’s DVRs are trading at a 23% discount (with 5% higher dividend), while
Gujarat NRE Coke’s DVRs are trading at a 45% discount (with 1/100th voting rights as
common share, and same rate of dividend) to common share price (Exhibit 1).
b) We also find that the two classes of shares trade closely together for European
automobile companies such as Volvo and Scania (1% price differential currently).
We retain our Neutral rating on the common share and FY12E EV/EBITDA-based
12-month target price of Rs1,106. Key risks: (1) higher-/lower-than-expected sales volume
and margins at JLR; and (2) lack of visibility of detailed financials at JLR which is a key
driver of valuation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Motors (TAMO.BO)
Neutral Equity Research
Trading at mid-cycle; DVR discount widens
What's changed
We continue to believe that EV-based valuation parameters are more
appropriate for Tata Motors given high financial leverage relative to peers,
and the unfolding turnaround at JLR looks priced in when evaluated on
metrics such as EV/IC, EV/Sales and EV/EBITDA. We observe that the price
differential between Tata Motors’ common shares and its DVRs
(Differential Voting Rights) has widened to Jan. 2010 levels of a discount of
43% (vs. an historical range of -45% to -10%, and average of -30%). We
note that DVRs offer similar economic rights (1/10th voting right of a
common share, 5% higher dividend) as common shares. An overview of
BSE filings since Jul. 2001 suggests very few instances of minority
shareholder opposition to resolutions proposed by management. In
examining other DVRs in India and the global auto industry, we note that
Pantaloon Retail DVR is currently trading at a 23% discount to common
(with 5% higher dividend), while Gujarat NRE Coke DVR trades at a 45%
discount (1/100th voting rights and same dividend rate).
Implications
We consider liquidity and voting rights in the context of the DVR valuation
discount; however we do not attempt to quantify an appropriate discount
in this note as we do not cover the DVR securities. We retain our Neutral
rating on the common share and FY12E EV/EBITDA-based 12-month target
price of Rs1,106, and offer some updated valuation analysis in this note.
Valuation
The common share is currently trading at a mid-cycle multiple of 5.6X
FY12E EV/EBITDA vs. DVRs at 3.9X, Indian auto coverage average at 7.3X,
3.3X for Europe and 4.6X globally.
Key risks
1) Higher-/lower-than-expected sales volume and margins at JLR; and 2) lack
of visibility of detailed financials at JLR which is a key driver of valuation.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
Trading at mid-cycle; DVR discount widens
We continue to believe that EV-based valuation parameters are more appropriate for Tata
Motors given its high financial leverage relative to peers, and we think the unfolding
turnaround at JLR looks priced in when evaluated on metrics such as EV/IC, EV/Sales and
EV/EBITDA. The common share is currently trading at a mid-cycle multiple of 5.6X FY12E
EV/EBITDA vs. DVRs at 3.9X, our Indian auto coverage average at 7.3X, 3.3X for Europe
and 4.6X globally. On Director’s Cut valuation matrix relative to global coverage, the stock
appears reasonably valued. On RoE-implied valuation relative to global coverage Tata
Motors appears under-valued, but we believe this is due to relatively high financial
leverage that results in higher RoE. Relative to India coverage Tata Motors appears undervalued
on both Director’s Cut and RoE implied valuation. We believe this is due to the fact
that more than 70% of operating profit is contributed by the European business (JLR).
Valuation multiples for European peers have historically been lower compared with
Indian companies (for example, see Exhibit 4).
We observe that the price differential between Tata Motors’ common shares and its DVRs
(Differential Voting Rights) has widened to Jan. 2010 levels of a discount of 43% (vs. an
historical range of -45% to -10%, and average of -30%). We make the following
observations:
1. DVRs offer nearly the same economic rights as common shares
Excluding voting rights (1/10th of a common share), the DVRs offer similar economic
rights to the investor, and 5% higher dividend compared with common shares. As per a
postal ballot notice filed by Tata Motors with BSE on July 15, 2008, the DVRs “issued by
the Company will enjoy all rights and privileges that are attached to Ordinary Shares in
law and by the provisions of these presents, except as to voting and/or dividend, as
provided in these Articles and as may be permitted under applicable law from time to
time” (source: BSE website; our emphasis).
2. Valuation discount: we examine voting rights and liquidity
We analyzed voting rights and liquidity in the context of the valuation discount for this
security:
(a) Voting rights – On reviewing the proceedings of Annual General Meetings and records
of significant resolutions passed at Extraordinary General Meetings or through postal
ballot since Jul. 2001 as available on the BSE website, we find very few instances of
significant shareholder opposition to resolutions proposed by the management over the
last 10 years.
(b) Liquidity – Tata Motors’ DVRs are among the top 70 stocks in terms of 3-month average
daily traded volume (US$ mn) relative to Goldman Sachs’ India coverage, with about
US$7mn daily average traded volume over the last 3 weeks. We note that its average daily
traded value is higher than or comparable to the common shares of automobile peers such
as Ashok Leyland, TVS Motors, Apollo Tyres and Bosch India. We also note that Tata
Motors’ DVRs are part of the National Stock Exchange F&O segment, where inclusion is
based on stringent market cap and average daily traded value criteria. We note that liquidity
has risen after the Oct 2010 capital raising exercise by the company when about 32mn
additional DVR shares were issued (Exhibit 2).
3. Analysis of comparable DVRs
We analyze other DVR examples in India and the global auto industry:
a) We found only two instances of Indian companies with different classes of shares -
Pantaloon Retail’s DVRs are trading at a 23% discount (with 5% higher dividend), while
Gujarat NRE Coke’s DVRs are trading at a 45% discount (with 1/100th voting rights as
common share, and same rate of dividend) to common share price (Exhibit 1).
b) We also find that the two classes of shares trade closely together for European
automobile companies such as Volvo and Scania (1% price differential currently).
We retain our Neutral rating on the common share and FY12E EV/EBITDA-based
12-month target price of Rs1,106. Key risks: (1) higher-/lower-than-expected sales volume
and margins at JLR; and (2) lack of visibility of detailed financials at JLR which is a key
driver of valuation.
No comments:
Post a Comment