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UBS Investment Research
Tata Motors Ltd.
Earnings are likely to have peaked, Sell
„ Event: Further concerns on growth and margins
We believe the growth outlook for JLR is deteriorating. Apr’11 EU retail sales for
JLR were down 20%YoY. Also, US incentives have risen sharply for Jaguar brand
underscoring deteriorating demand environment. We believe domestic business
margins are like to remain under pressure given our negative view on the domestic
MHCV cycle as well as volume mix moving towards lower margin LCVs (Ace
Zip) and Nano along with sharp decline in sales of Indica and Indigo.
„ Impact: Reducing estimates for JLR and domestic business
We reduce our JLR vol. growth outlook from 16%/14% for FY12/13 to 14%/4%
respectively as we now expect little growth ex-Evoque. With rising incentives, we
expect JLR operating margins to decline to 10.2%/9.1% for FY12/13 from
10.5%/10.7% previously. We reduce our standalone business EBITDA margins
from 9.8%/9.6% to 9.0%/8.5%. We are reducing our FY12/13 EPS by 4%/20%.
„ Action: Earnings momentum is weak, downgrade to an anti-consensus Sell
We believe earnings are likely to remain stagnant as JLR depreciation spend will
rise rapidly to catch up with high R&D capitalization. We believe with limited free
cashflow generation due to high capex at JLR, the debt is unlikely to decline
meaningfully and interest cost is likely to remain high. We are 8%/21% below
consensus EPS for FY12/13.
„ Valuation: Downgrade Rating to Sell (from Buy), Reduce PT to Rs 920
We value the co. on a SoTP basis. We value the domestic business (and other subs)
at 8x FY13 EV/EBITDA (from 9x previously) and JLR at 4x FY13 EV/EBITDA.
We adjust our EBITDA for R&D capitalization.
Valuation
Q We use a sum-of-the-parts methodology to value Tata Motors. Given the
company’s practice of capitalising all its major research and product
development related expenses, we adjust our valuation to account for them.
Q We reduce our forward multiple for domestic business from 9x to 8x given
the anticipated slowdown in the domestic environment. The stock traded at
9.7x 12 month forward adj. EBITDA during Mar-04 to Mar-07 prior to
acquisition of JLR impacting forward earnings. However, stock has traded as
low as 6x EV/EBITDA during the FY06 mid-cycle slowdown. We value the
domestic business at 8x 12-month forward adjusted EBITDA.
Q We use 4x 12-month forward adjusted EBITDA for JLR’s operations.
Original equipment manufacturers (OEM) in the EU have traded at 3.5x-6x
forward EBITDA over the past decade.
Q We value Tata Motors’ 40% stake in Telcon (a construction equipment
company) at Rs20bn.
Q Tata Motors Ltd.
Tata Motors manufactures and sells commercial vehicles, utility vehicles, and
passenger cars in India. Tata Motors is the dominant player in the Indian
commercial vehicles space, with close to a 60% market share in both the
medium and heavy commercial vehicle markets in India as well as light
commercial vehicles. Tata Motors entered the passenger car market in 1998 with
the Indica model. In 2003, it released the mid-size sedan, Indigo, followed by
the Nano in 2009. In June 2008, Tata Motors acquired Jaguar and Land Rover
from Ford. The Tata Group owns 35% of Tata Motors.
Q Statement of Risk
Key risks for Tata Motors remain slowdown in CV demand in India, decline in
sales of Jaguar and Land Rover and inability to refinance debt on account of
acquisitions. Decline in demand for company's cars and LCV's remain the other
key risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tata Motors Ltd.
Earnings are likely to have peaked, Sell
„ Event: Further concerns on growth and margins
We believe the growth outlook for JLR is deteriorating. Apr’11 EU retail sales for
JLR were down 20%YoY. Also, US incentives have risen sharply for Jaguar brand
underscoring deteriorating demand environment. We believe domestic business
margins are like to remain under pressure given our negative view on the domestic
MHCV cycle as well as volume mix moving towards lower margin LCVs (Ace
Zip) and Nano along with sharp decline in sales of Indica and Indigo.
„ Impact: Reducing estimates for JLR and domestic business
We reduce our JLR vol. growth outlook from 16%/14% for FY12/13 to 14%/4%
respectively as we now expect little growth ex-Evoque. With rising incentives, we
expect JLR operating margins to decline to 10.2%/9.1% for FY12/13 from
10.5%/10.7% previously. We reduce our standalone business EBITDA margins
from 9.8%/9.6% to 9.0%/8.5%. We are reducing our FY12/13 EPS by 4%/20%.
„ Action: Earnings momentum is weak, downgrade to an anti-consensus Sell
We believe earnings are likely to remain stagnant as JLR depreciation spend will
rise rapidly to catch up with high R&D capitalization. We believe with limited free
cashflow generation due to high capex at JLR, the debt is unlikely to decline
meaningfully and interest cost is likely to remain high. We are 8%/21% below
consensus EPS for FY12/13.
„ Valuation: Downgrade Rating to Sell (from Buy), Reduce PT to Rs 920
We value the co. on a SoTP basis. We value the domestic business (and other subs)
at 8x FY13 EV/EBITDA (from 9x previously) and JLR at 4x FY13 EV/EBITDA.
We adjust our EBITDA for R&D capitalization.
Valuation
Q We use a sum-of-the-parts methodology to value Tata Motors. Given the
company’s practice of capitalising all its major research and product
development related expenses, we adjust our valuation to account for them.
Q We reduce our forward multiple for domestic business from 9x to 8x given
the anticipated slowdown in the domestic environment. The stock traded at
9.7x 12 month forward adj. EBITDA during Mar-04 to Mar-07 prior to
acquisition of JLR impacting forward earnings. However, stock has traded as
low as 6x EV/EBITDA during the FY06 mid-cycle slowdown. We value the
domestic business at 8x 12-month forward adjusted EBITDA.
Q We use 4x 12-month forward adjusted EBITDA for JLR’s operations.
Original equipment manufacturers (OEM) in the EU have traded at 3.5x-6x
forward EBITDA over the past decade.
Q We value Tata Motors’ 40% stake in Telcon (a construction equipment
company) at Rs20bn.
Q Tata Motors Ltd.
Tata Motors manufactures and sells commercial vehicles, utility vehicles, and
passenger cars in India. Tata Motors is the dominant player in the Indian
commercial vehicles space, with close to a 60% market share in both the
medium and heavy commercial vehicle markets in India as well as light
commercial vehicles. Tata Motors entered the passenger car market in 1998 with
the Indica model. In 2003, it released the mid-size sedan, Indigo, followed by
the Nano in 2009. In June 2008, Tata Motors acquired Jaguar and Land Rover
from Ford. The Tata Group owns 35% of Tata Motors.
Q Statement of Risk
Key risks for Tata Motors remain slowdown in CV demand in India, decline in
sales of Jaguar and Land Rover and inability to refinance debt on account of
acquisitions. Decline in demand for company's cars and LCV's remain the other
key risk.
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