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Weakening demand outlook
Tata Motors’ 1Q consol net profit grew just 1% YoY with margins weakening
QoQ in both India and JLR. Outlook for western world premium vehicle
demand has worsened given weakening macro fundamentals and we expect
JLR’s volume growth to slide by FY13. With amortization of capitalized R&D
set to rise sharply, any volume drop will have a much higher impact on JLR’s
net profit. Meanwhile, Tata’s India CV sales remain under pressure and its
India car franchise is weakening rapidly. We cut FY13 consol EPS by 29% and
downgrade Tata to U-PF with a target price of Rs790.
Margins weaken in both India and JLR in 1Q
The highlight of the 1Q results was the meaningful margin contraction in both
India and JLR. India EBITDA margins fell 90bps QoQ while JLR’s margins fell 80
bps QoQ, with the former getting impacted by the weak business environment
and rising other costs and the latter getting impacted by adverse currency
movement. Management commentary on India and JLR margins was pessimistic.
On JLR, management said that margins will weaken directionally given market
conditions and rising proportion of the ‘Evoque’ in sales, which pretty much
confirms that ‘Evoque’ has lower margins than other products.
Demand outlook weakening for JLR
We believe that the probability of another slowdown in western world economies
has risen sharply and expect western world premium vehicle demand to start
weakening by 2H, impacting 61% of JLR’s volumes. We expect demand from
China to remain strong as JLR expands its dealership network but believe this is
not likely to compensate for the western world drop since China is just 16% of
JLR’s volumes. We cut JLR’s FY13 volumes by 15%.
JLR’s earnings now much more sensitive to topline changes than before
We anticipate a sharp rise in JLR’s amortization charges in coming quarters,
especially after the launch of the ‘Evoque’, as a large part of capitalized R&D &
product development spend moves from CWIP to Gross Block. This, combined
with some weakness in gross margins due to weakening pricing power and
‘Evoque’ launch, could impact profits sharply with even a small volume drop.
Risk-reward is unfavourable; downgrade to U-PF
We cut FY13 consol EPS by 29% factoring in 15% lower volumes and just
50bps lower gross margins in JLR. Our estimates assume a recovery in India
CV and car sales in FY13, which by no means is a certainty. If the western
world weakness is more acute or spreads to China, our estimates would have
further downside. Overall risk-reward remains unfavourable even after YTD
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Weakening demand outlook
Tata Motors’ 1Q consol net profit grew just 1% YoY with margins weakening
QoQ in both India and JLR. Outlook for western world premium vehicle
demand has worsened given weakening macro fundamentals and we expect
JLR’s volume growth to slide by FY13. With amortization of capitalized R&D
set to rise sharply, any volume drop will have a much higher impact on JLR’s
net profit. Meanwhile, Tata’s India CV sales remain under pressure and its
India car franchise is weakening rapidly. We cut FY13 consol EPS by 29% and
downgrade Tata to U-PF with a target price of Rs790.
Margins weaken in both India and JLR in 1Q
The highlight of the 1Q results was the meaningful margin contraction in both
India and JLR. India EBITDA margins fell 90bps QoQ while JLR’s margins fell 80
bps QoQ, with the former getting impacted by the weak business environment
and rising other costs and the latter getting impacted by adverse currency
movement. Management commentary on India and JLR margins was pessimistic.
On JLR, management said that margins will weaken directionally given market
conditions and rising proportion of the ‘Evoque’ in sales, which pretty much
confirms that ‘Evoque’ has lower margins than other products.
Demand outlook weakening for JLR
We believe that the probability of another slowdown in western world economies
has risen sharply and expect western world premium vehicle demand to start
weakening by 2H, impacting 61% of JLR’s volumes. We expect demand from
China to remain strong as JLR expands its dealership network but believe this is
not likely to compensate for the western world drop since China is just 16% of
JLR’s volumes. We cut JLR’s FY13 volumes by 15%.
JLR’s earnings now much more sensitive to topline changes than before
We anticipate a sharp rise in JLR’s amortization charges in coming quarters,
especially after the launch of the ‘Evoque’, as a large part of capitalized R&D &
product development spend moves from CWIP to Gross Block. This, combined
with some weakness in gross margins due to weakening pricing power and
‘Evoque’ launch, could impact profits sharply with even a small volume drop.
Risk-reward is unfavourable; downgrade to U-PF
We cut FY13 consol EPS by 29% factoring in 15% lower volumes and just
50bps lower gross margins in JLR. Our estimates assume a recovery in India
CV and car sales in FY13, which by no means is a certainty. If the western
world weakness is more acute or spreads to China, our estimates would have
further downside. Overall risk-reward remains unfavourable even after YTD
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