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As economists start to predict lower global GDP growth, we undertake a bear case scenario
analysis for Tata Motors, Bajaj Auto and Bharat Forge - companies with significant exposure
to overseas markets. We estimate potential EPS downgrades of 15-40% and fair value
downgrades of 23-51%.
Background to our analysis
Many commentators are now suggesting that Europe and the US will tip into recession later
this year and into the next. We have examined our EPS forecasts for FY13 and estimated
potential recession EPS forecasts and valuations assuming a material slowdown under such
a bear-case scenario for Tata Motors, Bajaj Auto and Bharat Forge (the three companies in
our coverage universe with significant sales exposure to overseas markets). However, with
strengthened balance sheets and cost cutting measures in place, we expect impact to be
lower than in the 2008-09 recession. We estimate potential earnings decline of 15% for Bajaj
(the least of the three as its exposure to developed market is relatively low), 35% for Bharat
Forge (53% of FY11 revenue from the US and Europe) and 40% for Tata Motors (60% of
FY11 revenue from JLR).
Valuation approach: today and under a recessionary outlook
We generally value Bajaj on one-year forward PE multiple basis, Tata Motors on a SOTP
and Consolidated Bharat Forge on a DCF valuation basis. In Tata Motors, we value the
standalone business on a DCF basis and other subsidiaries on relative valuation methods.
However, for the purpose of this analysis, we have valued both Consolidated Bharat Forge
and Tata Motors standalone on a one-year forward PE multiple basis using historical trends
from the last downturn in order to capture market sentiment. For Bajaj and other subsidiaries
of Tata, we have given c20% discounts to our target multiples taking into account low growth
expectations. We see potential downside to our target prices in our bear-case scenario of 23% for
Bajaj, 34% for Bharat Forge and 51% for Tata Motors.
Free cash flow variance and balance sheet vulnerability
In a recession scenario, we believe Tata, which has a large capex programme, may have room to
defer some of its R&D and capex expenses, particularly in JLR. However, the other two
companies have relatively smaller capex programmes going into FY13 and, as such, capex
deferment may not have a significant impact. Also, we do not expect the balance sheet positions
of either Tata Motors (which has improved its capital base significantly since the last downturn) or
Bharat forge deteriorating to an alarming position and expect their net debt to equity ratios to
remain comfortably below 1x. We expect Bajaj to remain in a net cash position even in a
slowdown.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
As economists start to predict lower global GDP growth, we undertake a bear case scenario
analysis for Tata Motors, Bajaj Auto and Bharat Forge - companies with significant exposure
to overseas markets. We estimate potential EPS downgrades of 15-40% and fair value
downgrades of 23-51%.
Background to our analysis
Many commentators are now suggesting that Europe and the US will tip into recession later
this year and into the next. We have examined our EPS forecasts for FY13 and estimated
potential recession EPS forecasts and valuations assuming a material slowdown under such
a bear-case scenario for Tata Motors, Bajaj Auto and Bharat Forge (the three companies in
our coverage universe with significant sales exposure to overseas markets). However, with
strengthened balance sheets and cost cutting measures in place, we expect impact to be
lower than in the 2008-09 recession. We estimate potential earnings decline of 15% for Bajaj
(the least of the three as its exposure to developed market is relatively low), 35% for Bharat
Forge (53% of FY11 revenue from the US and Europe) and 40% for Tata Motors (60% of
FY11 revenue from JLR).
Valuation approach: today and under a recessionary outlook
We generally value Bajaj on one-year forward PE multiple basis, Tata Motors on a SOTP
and Consolidated Bharat Forge on a DCF valuation basis. In Tata Motors, we value the
standalone business on a DCF basis and other subsidiaries on relative valuation methods.
However, for the purpose of this analysis, we have valued both Consolidated Bharat Forge
and Tata Motors standalone on a one-year forward PE multiple basis using historical trends
from the last downturn in order to capture market sentiment. For Bajaj and other subsidiaries
of Tata, we have given c20% discounts to our target multiples taking into account low growth
expectations. We see potential downside to our target prices in our bear-case scenario of 23% for
Bajaj, 34% for Bharat Forge and 51% for Tata Motors.
Free cash flow variance and balance sheet vulnerability
In a recession scenario, we believe Tata, which has a large capex programme, may have room to
defer some of its R&D and capex expenses, particularly in JLR. However, the other two
companies have relatively smaller capex programmes going into FY13 and, as such, capex
deferment may not have a significant impact. Also, we do not expect the balance sheet positions
of either Tata Motors (which has improved its capital base significantly since the last downturn) or
Bharat forge deteriorating to an alarming position and expect their net debt to equity ratios to
remain comfortably below 1x. We expect Bajaj to remain in a net cash position even in a
slowdown.
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