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Tata Motors (TAMO.BO): JLR due for a Renaissance?
What’s Priced in? What’s the Market Missing?
JLR due for a Renaissance? We think the new Range Rover Evoque
will be a game changer for JLR and address a market segment that
has quadrupled in size in China over the last two years. The Evoque
makes important strides in fuel efficiency, and could challenge the
dominance of BMW in the SAV/SUV segment.
India likely to slow, but reflected in our forecasts: Tata has a
dominant domestic franchise in commercial vehicles. However, we
acknowledge the macro slowdown in India. Our India business
earnings forecasts fall by 2% in F2012. We are much lower than
management guidance here, as we are pricing in all the potential
downside. We expect no growth for MHCVs and just 10% growth for
Cars and LCVs Ex Nano. We expect India business to post an
EBITDA margin of 9.2% in F2012.
What’s in the price: We believe investors are pricing in an India
slowdown but do not fully appreciate the positive impact of Evoque on
Tata Motors. On revised our earnings, the stock trades at 6.5x F2012e
with 18% earnings growth in F2012E. Our bull case offers 44% upside
and bear case 6% downside, implying an attractive risk-reward at
current levels.
Near-Term Catalysts
Evoque shipments to start in July/August 2011
High inflation, slowing economic growth and tight liquidity
drives MHCV volumes down 15% in F2012. We further
assume that Evoque fails and JLR posts 10% decline in
volumes in F2012 and F2012 EBITDA falls to £1.5bn.
6.0x F12e
EPS
Bear
Rs971
We assume flat growth in MHCV volume growth in F2012
and EBITDA margin in the India business falls to 9.2% in
F2012. On the success of Evoque, JLR posts sales of 300k
(23% growth) in F2012 and EBITDA of £2bn in F2012.
8.2x F12e
EPS
Base
Rs1,324
Driven by strong pickup in sales of Land Rover, successful
launch of Evoque, JLR posts volumes of 330k units in
F2012. JLR posts EBITDA of £2.2bn in F2012. India capex
cycle recovers, and MHCV post 12% growth in F2012.
9.2x F12e
EPS
Bull
Rs1,484
Derived from base-case scenario
Price Target
Rs1,324
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