Tata Motors : JLR – Adding Beta to the Business: Citi,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Tata Motors (TAMO.BO)
 JLR – Adding Beta to the Business: Phase 2
 
 Phase II of JLR’s transformation has now commenced  — Management has
indicated it will invest around £7.5bn in capex / R&D over the next five years,
underscoring its belief in the business and the product line-up.
 Business Implications? — a) JLR management is more confident on business
prospects, and is raising the risk-return profile of the business. b) Prima facie, we think
JLR’s risk profile is increasing as the cash-flow ‘margin of safety’ (EBITDA/capex)
decreases and, while we agree with management’s view that the investments are
necessary from a long-term perspective, on the flip side these investments render the
business relatively more vulnerable to a cyclical downturn in its domestic truck / car
business and as also to a macro slowdown in developed markets.
 Financial Implications and earnings impact —  a) decline in JLR EBIT margins (to 9-
10% over FY12-14) vs. 11.7% in FY11 as capital costs (depreciation / amortization /
product development expenses) escalate; b) RoCE at JLR will also trend downwards
(we estimate 25-27% over FY13/14) vs. 33-38% over FY11-12 as an asset block is
created.  Earnings Impact:  consolidated earnings forecast at Rs147 / Rs158 for
FY12/13 (cut from Rs186/Rs205 respectively) as FY12/13 EBIT forecasts are slashed
13% / 19% respectively. At the operating level, we’ve cut JLR FY13 EBITDA by 3%.
 Maintain Buy — We note that the sharp reduction in the stock price amply reflects
concerns on the heightened capex. Additionally, some of the concerns on the macro
side are reflected too, though given the debt / macro concerns in Europe and the
deceleration in the CV cycle, we acknowledge that the next 6-9 months could be
challenging from a stock-price perspective.
 TP of Rs1,203  — Our TP reflects re-aligned SOTP methodology to reflect higher
capex at JLR, as also a mid-peak cycle in the domestic CV business. We value the
parent at Rs623 / sh (7x Mar13 EBITDA), JLR at Rs603 / sh (3x Mar13 EBITDA) and
subsidiaries at Rs85 / sh (after 20% holdco discount).  Key Risks? — 1) Further
deceleration in CV sales, 2) Adverse impact of currency, mix on JLR margins


Tata Motors (TAMO.BO)
 JLR – Adding Beta to the Business: Part 2
 
 Phase II of JLR’s transformation has now commenced  — Management has
indicated it will invest around £7.5bn in capex / R&D over the next five years,
underscoring its belief in the business and the product line-up.
 Business Implications? — a) JLR management is more confident on business
prospects, and is raising the risk-return profile of the business. b) Prima facie, we think
JLR’s risk profile is increasing as the cash-flow ‘margin of safety’ (EBITDA/capex)
decreases and, while we agree with management’s view that the investments are
necessary from a long-term perspective, on the flip side these investments render the
business relatively more vulnerable to a cyclical downturn in its domestic truck / car
business and as also to a macro slowdown in developed markets.
 Financial Implications and earnings impact —  a) decline in JLR EBIT margins (to 9-
10% over FY12-14) vs. 11.7% in FY11 as capital costs (depreciation / amortization /
product development expenses) escalate; b) RoCE at JLR will also trend downwards
(we estimate 25-27% over FY13/14) vs. 33-38% over FY11-12 as an asset block is
created.  Earnings Impact:  consolidated earnings forecast at Rs147 / Rs158 for
FY12/13 (cut from Rs186/Rs205 respectively) as FY12/13 EBIT forecasts are slashed
13% / 19% respectively. At the operating level, we’ve cut JLR FY13 EBITDA by 3%.
 Maintain Buy — We note that the sharp reduction in the stock price amply reflects
concerns on the heightened capex. Additionally, some of the concerns on the macro
side are reflected too, though given the debt / macro concerns in Europe and the
deceleration in the CV cycle, we acknowledge that the next 6-9 months could be
challenging from a stock-price perspective.
 TP of Rs1,203  — Our TP reflects re-aligned SOTP methodology to reflect higher
capex at JLR, as also a mid-peak cycle in the domestic CV business. We value the
parent at Rs623 / sh (7x Mar13 EBITDA), JLR at Rs603 / sh (3x Mar13 EBITDA) and
subsidiaries at Rs85 / sh (after 20% holdco discount).  Key Risks? — 1) Further
deceleration in CV sales, 2) Adverse impact of currency, mix on JLR margins