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Earnings momentum to slow
Domestic and JLR businesses entering a low growth phase
Best of CV cycle seems behind us; TTMT losing share in cars
JLR margins peaking as incentives bottom and forex benefits go
Downgrade to HOLD (from Buy); cut TP to INR1,245
Downgrade to HOLD
We downgrade Tata Motors (TTMT) to
HOLD (from Buy) as we believe the
domestic and Jaguar LandRover (JLR)
businesses are on the verge of entering a
low growth phase. On the domestic side,
we now seem past the high growth years
of the commercial vehicle (CV) cycle. The
company’s passenger-car business
continues to lose market share in key
segments. For subsidiary JLR, we expect
volume CAGR to slow to 10-11% over
FY11-13 and margins to contract, due to
bottoming out of incentives, diminishing
operating leverage benefit, and reversal of the forex gains of 2010.
Best of CV cycle behind us; TTMT losing share in cars
We believe the best years of the CV cycle are behind us. After two years
of 35%+ growth, we expect growth in heavy-truck sales to moderate to
15% in FY12 and further to 10% in FY13. Historically, CV cycles have
lasted for 4-5 years with two years of very high growth followed by
moderate growth and then negative growth. On the passenger car side
(ex-Nano), we expect loss of market share in the compact car (A2) and
mid-size sedan (A3) segments to result in sub-industry growth rate.
We expect JLR margins to come off
We expect JLR’s EBITDA margin to decline about 200bp in FY12, from
17.4% in 3QFY11. We estimate about 500bp of currency gains seen in
1HCY10 have since reversed and should start chipping off from the
reported EBITDA margin as hedges expire over the course of FY12
(Exhibit 9 and 10). Since incentives are close to previous lows, we
believe model-wise realisations are unlikely to improve from hereon. We
also expect volume CAGR to slow to 10-11% over FY11-13, from the
26% growth seen in FY11. Hence, operating leverage is unlikely to
benefit margins significantly.
FY11-13E EPS CAGR of 7%
We estimate TTMT’s earnings CAGR will slow to 7% over FY11-13. We
cut our SoTP-based-TP to INR1,245.00 (from INR1,406.00), comprising
INR454 for the parent (based on a mid-cycle multiple of 7x FY12E
EV/EBITDA), INR654 for JLR (based on 4x FY12E EV/EBITDA, in line
with European peers using Bloomberg consensus estimates), and
INR137 for subsidiaries/investments. Key upside risks to our TP include
higher-than-expected volumes in the domestic and JLR businesses and a
fall in commodity prices.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another
resource to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Earnings momentum to slow
Domestic and JLR businesses entering a low growth phase
Best of CV cycle seems behind us; TTMT losing share in cars
JLR margins peaking as incentives bottom and forex benefits go
Downgrade to HOLD (from Buy); cut TP to INR1,245
Downgrade to HOLD
We downgrade Tata Motors (TTMT) to
HOLD (from Buy) as we believe the
domestic and Jaguar LandRover (JLR)
businesses are on the verge of entering a
low growth phase. On the domestic side,
we now seem past the high growth years
of the commercial vehicle (CV) cycle. The
company’s passenger-car business
continues to lose market share in key
segments. For subsidiary JLR, we expect
volume CAGR to slow to 10-11% over
FY11-13 and margins to contract, due to
bottoming out of incentives, diminishing
operating leverage benefit, and reversal of the forex gains of 2010.
Best of CV cycle behind us; TTMT losing share in cars
We believe the best years of the CV cycle are behind us. After two years
of 35%+ growth, we expect growth in heavy-truck sales to moderate to
15% in FY12 and further to 10% in FY13. Historically, CV cycles have
lasted for 4-5 years with two years of very high growth followed by
moderate growth and then negative growth. On the passenger car side
(ex-Nano), we expect loss of market share in the compact car (A2) and
mid-size sedan (A3) segments to result in sub-industry growth rate.
We expect JLR margins to come off
We expect JLR’s EBITDA margin to decline about 200bp in FY12, from
17.4% in 3QFY11. We estimate about 500bp of currency gains seen in
1HCY10 have since reversed and should start chipping off from the
reported EBITDA margin as hedges expire over the course of FY12
(Exhibit 9 and 10). Since incentives are close to previous lows, we
believe model-wise realisations are unlikely to improve from hereon. We
also expect volume CAGR to slow to 10-11% over FY11-13, from the
26% growth seen in FY11. Hence, operating leverage is unlikely to
benefit margins significantly.
FY11-13E EPS CAGR of 7%
We estimate TTMT’s earnings CAGR will slow to 7% over FY11-13. We
cut our SoTP-based-TP to INR1,245.00 (from INR1,406.00), comprising
INR454 for the parent (based on a mid-cycle multiple of 7x FY12E
EV/EBITDA), INR654 for JLR (based on 4x FY12E EV/EBITDA, in line
with European peers using Bloomberg consensus estimates), and
INR137 for subsidiaries/investments. Key upside risks to our TP include
higher-than-expected volumes in the domestic and JLR businesses and a
fall in commodity prices.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another
resource to use in their decision-making process.
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