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Tata Motors (REDUCE)
Automobiles
Entering into a slower growth phase. We downgrade Tata Motors to REDUCE (from
ADD) as we expect JLR operating margins to decline due to a slowdown in volume
growth and higher incentives in US. Domestic business is likely to be under pressure due
to slower growth in commercial vehicle and passenger car businesses. We cut our
target price to Rs1,060 (from Rs1,290 earlier). We have reduced our consolidated
earnings estimates by 8% over FY2012-2013E.
Sharp decline in JLR European volumes and increase in incentives in US to impact earnings
JLR European volumes have declined by 16-18% yoy in April-May 2011 which is a cause of
concern while incentives in US for JLR vehicles have increased by 73% in April-May 2011 versus
4QFY2011 period indicating weak underlying demand in US. We forecast EBITDA margins to
decline by 110 bps over FY2011-2013E as we factor in the increase in incentives in US in our
estimates. We cut our JLR earnings estimates by 7-10% over FY2012-2013E.
Market share losses in passenger car business are likely to continue
We have cut our domestic passenger car volume estimates by 4% over FY2012-2013E as we
believe Tata Motors is likely to lose market share to Toyota, Volkswagen and Honda as they have a
superior product than Tata Motors. We have revised our standalone earnings downwards by
2-10% over FY2012-2013E factoring in decline in passenger car volumes. Domestic business is
likely to remain under pressure due to muted growth in both commercial vehicle and passenger car
businesses (57% of standalone volumes).
Our consolidated estimates are 20-22% below consensus estimates for FY2012-2013E
Our consolidated earnings estimates are 20-22% below consensus earnings estimates as we
believe consensus is not factoring in the slowdown in JLR volumes due to slowing growth in
Europe and has not factored in increase in depreciation/product development expenses for JLR due
to rise in capex estimates.
We downgrade the stock to REDUCE (from ADD)
We downgrade the stock to REDUCE (from ADD) and reduce our target price to Rs1,060 (from
Rs1,290 earlier) as we cut our consolidated earnings by 8% over FY2012-2013E. Our target price
of Rs1,060 is based on – (1) 7X EV/EBITDA multiple on our FY2013E standalone earnings estimate
(slightly lower than the mid-cycle multiple of 7.5X), (2) 4X EV/EBITDA multiple for JLR business and
(3) We also ascribe a value of Rs112/share for the other subsidiaries of Tata Motors.
Downgrade to REDUCE (from ADD)
We downgrade the stock to REDUCE (from ADD) as we believe JLR and domestic business
will go through a slower earnings growth period due to (1) a slowdown in commercial
vehicle and passenger car businesses and (2) pressure on JLR operating margins due to
increase in incentives and slowdown in the UK market. We revise our consolidated earnings
downwards by 8% over FY2012-2013E as we cut our passenger car volumes of Tata Motors
by 4% and revise down our JLR EBITDA margin assumptions due to increase in incentives in
the US market.
We value the stock on sum of the parts valuation methodology. Our target price of Rs1,060
is based on – (1) 7X EV/EBITDA multiple on our FY2013E standalone earnings estimate
(slightly lower than the mid cycle multiple of 7.5X), (2) 4X EV/EBITDA multiple for JLR
business and (3) We also ascribe a value of Rs 112/share for the other subsidiaries of Tata
Motors.
We value the standalone business at a 7% discount to its historical EV/EBITDA valuation and
value the JLR business valuations at 4X EV/EBITDA. We have cut our target EV/EBITDA
multiple for standalone business from 8X to 7X and JLR target multiple from 4.5X to 4X
EV/EBITDA to factor in slower earnings growth over the next two years.
Domestic business to remain under pressure
We expect standalone earnings to increase at a moderate pace of 5% CAGR between
FY2011 and FY2013E due to the following reasons:
(1) We forecast 8% CAGR in medium and heavy commercial vehicle volumes as
industrial production is slowing down. Growth in the freight generating sectors like
steel, cement, coal and automobiles has slowed down over the last few months
and is expected to remain weak in FY2012E. Truck freight rates have started to
decline marginally over the last few months and our channel checks suggest truck
operators are finding difficult to get loads on return trips which will have an impact
on their profitability in our view. Export/import freight traffic and agricultural
produce are two sectors which are still showing robust growth.
(2) We estimate domestic passenger car volumes (ex Nano) for Tata Motors to decline
by 5% yoy in FY2012E before increasing by 8% yoy in FY2013E. We expect Tata
Motors to lose 180 bps market share over FY2011-2013E period due to inferior
product and increase in competitive intensity. We forecast Nano volumes of 84,000
units in FY2012E and 96,600 in FY2013E.
(3) We estimate light commercial vehicle volumes to remain strong driven by – (1) need
for last mile connectivity and (2) strong demand for low tonnage goods. We
forecast a 15% CAGR growth in LCV volumes between FY2011 and FY2013E.
(4) We believe utility vehicle volumes will grow at a moderate pace of 10% CAGR
between FY2011 and FY2013E and expect Tata Motors to lose market share to
Maruti’s new utility vehicle launch in 4QFY12E and Toyota Innova.
(5) We forecast EBITDA margins to decline by 100 bps over the next two years due to
deterioration in product mix (higher Nano sales, lower MHCV sales) and
deterioration in margins in the passenger car business.
JLR margins likely to remain under pressure
We believe JLR volume growth will be reasonably buoyant driven by growth in China, Russia,
US and other emerging markets offset by weakness in European market. We estimate it to
increase by 9% yoy in FY2012E and 8% yoy in FY2013E. However, we forecast 8% yoy
decline in European volumes in FY2012E and a flat growth in FY2013E.
We believe EBITDA margins of JLR will decline by 110 bps over FY2011-2013E due to the
following reasons:
(1) JLR US incentives have increased by 73% in April-May 2011 versus 4QFY11 average
which in our view is supporting growth of luxury car volumes in US. We forecast a
12% yoy volume growth in US in FY2012E and 8% yoy volume growth in US in
FY2013E. Variable incentives formed 12.6% of revenues in FY2009 and has come
down very significantly over the last 2 years which we forecast would be ~8% of
revenues in FY2011. We believe variable incentives will increase to 9% of revenues
in FY2012E thus impacting EBITDA margins by 100 bps.
(2) We forecast Evoque volumes of 15,000 units (likely to be launched in September
2011) in FY2012E and 25,000 units in FY2013E. We believe Evoque EBITDA
margins would be lower than existing margins considering lower ASPs, higher fixed
costs initially on lower volumes and higher aluminium content used to lower CO2
emissions.
(3) We are also concerned on the sharp decline in UK volumes which is a second
highest profitable market for JLR. UK retail volumes of JLR declined by 38% yoy and
16% yoy in April and May 2011, respectively which is a matter of concern and
could weigh on JLR profitability. EU retail volumes have declined by 16-18% yoy
over April-May 2011 for JLR far below market growth of 1-11% yoy during this
period.
Free cash flow generation will reduce going forward due to increase in capex
JLR has also increased its capex + R&D estimates from 803 mn pounds in FY2011 to 1.5 bn
pounds annual capex over the next 5 years. Capex will be used to reduce CO2 emissions,
invest in new product development and increase capacities at the Halewood plant. JLR
generated a free cash flow of 881 mn pounds in FY2011 which we believe will decline to 22
mn pounds in FY2012E and 46 mn pounds in FY2013E due to decline in profitability.
We revise our consolidated earnings downwards by 8% over FY2012-2013E
We have revised our standalone earnings estimates by 2-11% over FY2012-2013E due to
4% downward revision in volumes. We also revise our JLR EBITDA margin downwards by 40
bps over FY2012-2013E primarily due to increase in incentives in JLR in the US market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Motors (REDUCE)
Automobiles
Entering into a slower growth phase. We downgrade Tata Motors to REDUCE (from
ADD) as we expect JLR operating margins to decline due to a slowdown in volume
growth and higher incentives in US. Domestic business is likely to be under pressure due
to slower growth in commercial vehicle and passenger car businesses. We cut our
target price to Rs1,060 (from Rs1,290 earlier). We have reduced our consolidated
earnings estimates by 8% over FY2012-2013E.
Sharp decline in JLR European volumes and increase in incentives in US to impact earnings
JLR European volumes have declined by 16-18% yoy in April-May 2011 which is a cause of
concern while incentives in US for JLR vehicles have increased by 73% in April-May 2011 versus
4QFY2011 period indicating weak underlying demand in US. We forecast EBITDA margins to
decline by 110 bps over FY2011-2013E as we factor in the increase in incentives in US in our
estimates. We cut our JLR earnings estimates by 7-10% over FY2012-2013E.
Market share losses in passenger car business are likely to continue
We have cut our domestic passenger car volume estimates by 4% over FY2012-2013E as we
believe Tata Motors is likely to lose market share to Toyota, Volkswagen and Honda as they have a
superior product than Tata Motors. We have revised our standalone earnings downwards by
2-10% over FY2012-2013E factoring in decline in passenger car volumes. Domestic business is
likely to remain under pressure due to muted growth in both commercial vehicle and passenger car
businesses (57% of standalone volumes).
Our consolidated estimates are 20-22% below consensus estimates for FY2012-2013E
Our consolidated earnings estimates are 20-22% below consensus earnings estimates as we
believe consensus is not factoring in the slowdown in JLR volumes due to slowing growth in
Europe and has not factored in increase in depreciation/product development expenses for JLR due
to rise in capex estimates.
We downgrade the stock to REDUCE (from ADD)
We downgrade the stock to REDUCE (from ADD) and reduce our target price to Rs1,060 (from
Rs1,290 earlier) as we cut our consolidated earnings by 8% over FY2012-2013E. Our target price
of Rs1,060 is based on – (1) 7X EV/EBITDA multiple on our FY2013E standalone earnings estimate
(slightly lower than the mid-cycle multiple of 7.5X), (2) 4X EV/EBITDA multiple for JLR business and
(3) We also ascribe a value of Rs112/share for the other subsidiaries of Tata Motors.
Downgrade to REDUCE (from ADD)
We downgrade the stock to REDUCE (from ADD) as we believe JLR and domestic business
will go through a slower earnings growth period due to (1) a slowdown in commercial
vehicle and passenger car businesses and (2) pressure on JLR operating margins due to
increase in incentives and slowdown in the UK market. We revise our consolidated earnings
downwards by 8% over FY2012-2013E as we cut our passenger car volumes of Tata Motors
by 4% and revise down our JLR EBITDA margin assumptions due to increase in incentives in
the US market.
We value the stock on sum of the parts valuation methodology. Our target price of Rs1,060
is based on – (1) 7X EV/EBITDA multiple on our FY2013E standalone earnings estimate
(slightly lower than the mid cycle multiple of 7.5X), (2) 4X EV/EBITDA multiple for JLR
business and (3) We also ascribe a value of Rs 112/share for the other subsidiaries of Tata
Motors.
We value the standalone business at a 7% discount to its historical EV/EBITDA valuation and
value the JLR business valuations at 4X EV/EBITDA. We have cut our target EV/EBITDA
multiple for standalone business from 8X to 7X and JLR target multiple from 4.5X to 4X
EV/EBITDA to factor in slower earnings growth over the next two years.
Domestic business to remain under pressure
We expect standalone earnings to increase at a moderate pace of 5% CAGR between
FY2011 and FY2013E due to the following reasons:
(1) We forecast 8% CAGR in medium and heavy commercial vehicle volumes as
industrial production is slowing down. Growth in the freight generating sectors like
steel, cement, coal and automobiles has slowed down over the last few months
and is expected to remain weak in FY2012E. Truck freight rates have started to
decline marginally over the last few months and our channel checks suggest truck
operators are finding difficult to get loads on return trips which will have an impact
on their profitability in our view. Export/import freight traffic and agricultural
produce are two sectors which are still showing robust growth.
(2) We estimate domestic passenger car volumes (ex Nano) for Tata Motors to decline
by 5% yoy in FY2012E before increasing by 8% yoy in FY2013E. We expect Tata
Motors to lose 180 bps market share over FY2011-2013E period due to inferior
product and increase in competitive intensity. We forecast Nano volumes of 84,000
units in FY2012E and 96,600 in FY2013E.
(3) We estimate light commercial vehicle volumes to remain strong driven by – (1) need
for last mile connectivity and (2) strong demand for low tonnage goods. We
forecast a 15% CAGR growth in LCV volumes between FY2011 and FY2013E.
(4) We believe utility vehicle volumes will grow at a moderate pace of 10% CAGR
between FY2011 and FY2013E and expect Tata Motors to lose market share to
Maruti’s new utility vehicle launch in 4QFY12E and Toyota Innova.
(5) We forecast EBITDA margins to decline by 100 bps over the next two years due to
deterioration in product mix (higher Nano sales, lower MHCV sales) and
deterioration in margins in the passenger car business.
JLR margins likely to remain under pressure
We believe JLR volume growth will be reasonably buoyant driven by growth in China, Russia,
US and other emerging markets offset by weakness in European market. We estimate it to
increase by 9% yoy in FY2012E and 8% yoy in FY2013E. However, we forecast 8% yoy
decline in European volumes in FY2012E and a flat growth in FY2013E.
We believe EBITDA margins of JLR will decline by 110 bps over FY2011-2013E due to the
following reasons:
(1) JLR US incentives have increased by 73% in April-May 2011 versus 4QFY11 average
which in our view is supporting growth of luxury car volumes in US. We forecast a
12% yoy volume growth in US in FY2012E and 8% yoy volume growth in US in
FY2013E. Variable incentives formed 12.6% of revenues in FY2009 and has come
down very significantly over the last 2 years which we forecast would be ~8% of
revenues in FY2011. We believe variable incentives will increase to 9% of revenues
in FY2012E thus impacting EBITDA margins by 100 bps.
(2) We forecast Evoque volumes of 15,000 units (likely to be launched in September
2011) in FY2012E and 25,000 units in FY2013E. We believe Evoque EBITDA
margins would be lower than existing margins considering lower ASPs, higher fixed
costs initially on lower volumes and higher aluminium content used to lower CO2
emissions.
(3) We are also concerned on the sharp decline in UK volumes which is a second
highest profitable market for JLR. UK retail volumes of JLR declined by 38% yoy and
16% yoy in April and May 2011, respectively which is a matter of concern and
could weigh on JLR profitability. EU retail volumes have declined by 16-18% yoy
over April-May 2011 for JLR far below market growth of 1-11% yoy during this
period.
Free cash flow generation will reduce going forward due to increase in capex
JLR has also increased its capex + R&D estimates from 803 mn pounds in FY2011 to 1.5 bn
pounds annual capex over the next 5 years. Capex will be used to reduce CO2 emissions,
invest in new product development and increase capacities at the Halewood plant. JLR
generated a free cash flow of 881 mn pounds in FY2011 which we believe will decline to 22
mn pounds in FY2012E and 46 mn pounds in FY2013E due to decline in profitability.
We revise our consolidated earnings downwards by 8% over FY2012-2013E
We have revised our standalone earnings estimates by 2-11% over FY2012-2013E due to
4% downward revision in volumes. We also revise our JLR EBITDA margin downwards by 40
bps over FY2012-2013E primarily due to increase in incentives in JLR in the US market.
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