Tata Motors - “JLR puts Tata Motors in a sweet spot” :LKP research

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Standalone business disappoints again, JLR excels

Tata Motors(TAMO) consolidated sales was up by 43% yoy in Q2 FY12, majorly led by strong sales performance on the JLR business. JLR volumes grew by 37% yoy to 86,322 units, while EBITDA margins were at 18% post adjusting for currency gain. Standalone sales were up by 16% yoy and 3% qoq, as volumes grew by 22% yoy, driven by strong performance at LCV segment while PV segment continued to underperform over major part of the quarter. Consolidated margins came in at 15% while standalone margins sunk to 6.8% v/s 7.2% qoq, lowest in the recent past. Adverse product mix, high RM costs, higher discounts on the PVs & declining PV business led to fall in margins of the domestic business to fall. Consolidated PAT came in at Rs34.2mn, a growth of 42% yoy and 79% qoq.

Evoque proved the street wrong as being a margin dampener

JLR sold 2.46 lakh units in the first ten months of the year driven by China and other developing countries like Brazil, Russia and Middle East. Contribution from China has shot up from 13% in Q3 FY11 and 16% in Q2 FY12 to 17.1% in Q3 FY12 and the absolute volumes have grown 81% yoy. Launch of Evoque in September  across all geographies showed significant impact in the volumes of JLR (wholesale volumes of ~24,000 units in Q3). With Evoque expected to form 15-20% of volumes in FY13E, we expect a strong growth in JLR volumes going forward. Traction happening in emerging markets and steady performance in the US will be able to offset any weakness in the European continent and UK. Evoque was launched in China in the month of November, due to which the impact of Evoque sales in China was felt partially. We could see the complete effect from Q4, which would witness a further surge in Evoque volumes. Evoque was considered to be a margin dampener for JLR, however, with differential pricing in different geographies it has proved the street wrong. In Q3, in fact JLR reported one of their highest EBITDA margins at 18%. New model variants from JLR’s stable along with Evoque are the future growth drivers for JLR. Application of smaller diesel engines in Jaguar vehicles will also lead to volume improvement, for e.g. Jaguar XF model launched in July is receiving a good response. We expect JLR to report 300K units in FY12E and 343K in F 2013E.

Domestic LCV volumes to remain strong, PVs are on recovery trend

On the domestic front, CV sales are expected to hold up in the rest of the year as well. In difficult operating environment especially in South India, MHCV sales were up 7% in the first 10 months of the year FY 12, while LCV sales were up by 25% in the same period. Going forward, we expect MHCV sales to hold up on issues in South Indian markets getting resolved and interest rate cycle getting reversed. On the LCV front, the demand for Tata Ace family is expected to remain robust. With increasing capacities for Tata Ace at Dharwad facility, TAMO will keep pace with the increasing demand for the model. On the PV side, we have seen improvement off late coming from products like Nano and Indica Vista variant launched recently. The segment has posted a flattish growth in the first ten months of FY 12, as compared to a negative high single digit growth in the first half of the year. Also, going forward, the festive discounts are expected to reduce, thus improving PV margins. We expect MHCV/LCV/PV to grow by 6.5%/23%/-1% in FY 12E and 8%/17%/15% in FY 13E respectively.

Outlook and valuation

Although JLR margins peaked this quarter, we do not believe it is sustainable. However, we are confident that Evoque is not a margin dampener and hence improve our margin estimates from previous expectations to 15.5%/15.9% for JLR in FY12E/FY13E. With Evoque getting launched in China and given the good response it has got globally, we are raising our JLR estimates and hence value per share from JLR is moving up to Rs217. We believe the improvement in PV segment on domestic side is commendable and hence improve the volume estimates along with the higher expectations from LCV segment. Therefore, we value the stock at Rs 117 for its domestic business. We value TAMO at Rs318, which we have arrived by adding Rs21 for other subsidiaries to JLR and standalone businesses .