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Tata Motors
The JLR resurgence
Event
We transfer coverage of TTMT to Amit Mishra with an Outperform rating. We
are confident of strong growth at Jaguar Land Rover (80% of PAT) to continue
in FY12E on the back of successful recent launches and strong demand from
the key markets. We believe a potential slowdown in domestic sales will have
only a small impact as its contribution is <20%. TTMT stock has corrected
15% in the last three months and trades at an attractive 7.0x FY12E PER.
Impact
JLR – all set for another strong year. JLR sales volumes increased 19% in
2010, mainly driven by 95% growth in China (third largest market). We expect
JLR to achieve sales growth of 25% over FY11-13 as their new models (New
XJ, XF and Range Rover Evoque) have been well received and demand from
key markets (China and North America) remains strong. With a backlog of two
months for most models, we are confident about medium-term demand.
JLR – margins looks sustainable. JLR EBITDA margins have expanded by
1210bp over the 9MFY11. Key factors contributing to this are a favourable
product mix, increasing low-cost-sourcing and extensive cost rationalisation.
As the company is continuing with the cost-reduction initiatives, we believe
these high margins are likely to be sustained at current levels (~15%).
Domestic business – likely to have a slow year. We expect TTMT’s
M&HCV sales to grow 5% in FY12E, down from a 27% CAGR over FY09-
11E. We believe potential diesel price hikes, increased credit costs and price
hikes taken by OEMs will begin to hurt the profitability of the CV fleet owners
in FY12E. On the other hand, we expect LCVs to still grow strongly at 14% in
FY12E on the back of the strong growth in the economy.
Strong operating cashflows to further improve gearing. Post last year’s
equity placement, TTMT’s automotive debt/equity has fallen to 0.8x from
March 2010’s 2.0x. With JLR’s strong FCF, the balance sheet may strengthen
further.
Earnings and target price revision
We expect EPS growth of 24% in FY12E and our estimate is 6% ahead of
consensus. Our SOTP based TP of Rs1465 offers 18% upside.
Price catalyst
12-month price target: Rs1,465.00 based on a Sum of Parts methodology.
Catalyst: Faster than expected sales growth in JLR and domestic business
Action and recommendation
DVRs are even more attractive. The price differential between TTMT’s
common shares and DVRs (Differential Voting Rights) has widened to 45%,
the upper end of the historical range of 10-45%. DVRs have similar economic
rights but one-tenth of the voting rights and 5% higher dividend than common
shares. At ~7.0x FY12E PER and 5.3x consolidated FY12E EV/EBITDA the
stock appears attractively valued.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Motors
The JLR resurgence
Event
We transfer coverage of TTMT to Amit Mishra with an Outperform rating. We
are confident of strong growth at Jaguar Land Rover (80% of PAT) to continue
in FY12E on the back of successful recent launches and strong demand from
the key markets. We believe a potential slowdown in domestic sales will have
only a small impact as its contribution is <20%. TTMT stock has corrected
15% in the last three months and trades at an attractive 7.0x FY12E PER.
Impact
2010, mainly driven by 95% growth in China (third largest market). We expect
JLR to achieve sales growth of 25% over FY11-13 as their new models (New
XJ, XF and Range Rover Evoque) have been well received and demand from
key markets (China and North America) remains strong. With a backlog of two
months for most models, we are confident about medium-term demand.
JLR – margins looks sustainable. JLR EBITDA margins have expanded by
1210bp over the 9MFY11. Key factors contributing to this are a favourable
product mix, increasing low-cost-sourcing and extensive cost rationalisation.
As the company is continuing with the cost-reduction initiatives, we believe
these high margins are likely to be sustained at current levels (~15%).
Domestic business – likely to have a slow year. We expect TTMT’s
M&HCV sales to grow 5% in FY12E, down from a 27% CAGR over FY09-
11E. We believe potential diesel price hikes, increased credit costs and price
hikes taken by OEMs will begin to hurt the profitability of the CV fleet owners
in FY12E. On the other hand, we expect LCVs to still grow strongly at 14% in
FY12E on the back of the strong growth in the economy.
Strong operating cashflows to further improve gearing. Post last year’s
equity placement, TTMT’s automotive debt/equity has fallen to 0.8x from
March 2010’s 2.0x. With JLR’s strong FCF, the balance sheet may strengthen
further.
Earnings and target price revision
We expect EPS growth of 24% in FY12E and our estimate is 6% ahead of
consensus. Our SOTP based TP of Rs1465 offers 18% upside.
Price catalyst
12-month price target: Rs1,465.00 based on a Sum of Parts methodology.
Catalyst: Faster than expected sales growth in JLR and domestic business
Action and recommendation
DVRs are even more attractive. The price differential between TTMT’s
common shares and DVRs (Differential Voting Rights) has widened to 45%,
the upper end of the historical range of 10-45%. DVRs have similar economic
rights but one-tenth of the voting rights and 5% higher dividend than common
shares. At ~7.0x FY12E PER and 5.3x consolidated FY12E EV/EBITDA the
stock appears attractively valued.
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