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UBS Investment Research
Tata Motors Ltd.
W eak earnings momentum [EXTRACT]
Concerns on JLR growth and margins
On 13 June 2011, we downgraded Tata Motors (TAMO) from Buy to Sell, an anticonsensus
call, on concerns about a deteriorating growth outlook for Jaguar Land
Rover (JLR) and a negative view on the domestic medium & heavy commercial
vehicle (MHCV) cycle. JLR retail sales in the EU were down 20% YoY in April
2011. Also, incentives in the US have risen sharply for the Jaguar brand,
underscoring a deteriorating demand environment. With rising incentives, JLR’s
operating margins will decline; we expect 10.2%/9.1% margins for FY12/13.
Domestic business margins to remain under pressure
We believe the EBITDA margin (domestic business) is likely to remain under
pressure, as the domestic MHCV segment is in a downcycle, TAMO’s product mix
is shifting towards lower-margin LCVs (Ace Zip) and Nano, and a sharp decline
Indica and Indigo sales. We expect standalone margins at 9%/8.5% for FY12/13.
Balance sheet concerns
With limited free cash flow generation due to high capex at JLR, we believe debt is
unlikely to decline meaningfully and interest cost is likely to remain high. Our EPS
estimates are 8%/21% below consensus for FY12/FY13.
Valuation: Sell rating and price target of Rs920.00
We base our price target for TAMO on a sum-of-the-parts valuation. We value the
domestic business (and other subsidiaries) at 8x FY13E EV/EBITDA and JLR at
4x FY13E EV/EBITDA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tata Motors Ltd.
W eak earnings momentum [EXTRACT]
Concerns on JLR growth and margins
On 13 June 2011, we downgraded Tata Motors (TAMO) from Buy to Sell, an anticonsensus
call, on concerns about a deteriorating growth outlook for Jaguar Land
Rover (JLR) and a negative view on the domestic medium & heavy commercial
vehicle (MHCV) cycle. JLR retail sales in the EU were down 20% YoY in April
2011. Also, incentives in the US have risen sharply for the Jaguar brand,
underscoring a deteriorating demand environment. With rising incentives, JLR’s
operating margins will decline; we expect 10.2%/9.1% margins for FY12/13.
Domestic business margins to remain under pressure
We believe the EBITDA margin (domestic business) is likely to remain under
pressure, as the domestic MHCV segment is in a downcycle, TAMO’s product mix
is shifting towards lower-margin LCVs (Ace Zip) and Nano, and a sharp decline
Indica and Indigo sales. We expect standalone margins at 9%/8.5% for FY12/13.
Balance sheet concerns
With limited free cash flow generation due to high capex at JLR, we believe debt is
unlikely to decline meaningfully and interest cost is likely to remain high. Our EPS
estimates are 8%/21% below consensus for FY12/FY13.
Valuation: Sell rating and price target of Rs920.00
We base our price target for TAMO on a sum-of-the-parts valuation. We value the
domestic business (and other subsidiaries) at 8x FY13E EV/EBITDA and JLR at
4x FY13E EV/EBITDA.
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