Action: Downgrade to Neutral; TP reduced to INR251
JLR’s 4QFY12 EBITDA declined by 240bps q-q to 14.6%, well below our
estimate and consensus of 18-19%. JLR’s current margins are in line with
those of global peers and management’s guidance. We estimate the
EBITDA margin will stabilise around current levels of 14-15% over the
next two years, as upside from an improved China mix is likely to be
balanced by a weaker product mix and higher marketing expenses. We
thus reduce our FY13F/FY14F margins from 17.7%/18% to 14.1%/14.5%.
We now expect a 5% decline for domestic MHCVs in FY13F, compared
with 0% growth previously. The key argument for our Buy rating so far was
our above-consensus earnings estimates, which is no longer the case.
Even though our estimates are below consensus, we believe that the
recent stock price correction factors this in. Thus, the risk-reward appears
balanced, in our view.
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Catalysts: Success of new models (positive); global slowdown,
growth moderation in China and domestic truck slowdown (negative)
The success of new launches such as the Jaguar XF-Sportbrake and
C-X16 could present upside risks to our estimates.
Slowdown in developed markets such as the United States and in China
could be downside risks. Weaker domestic truck could also be a
downside risk.
Valuation: SOTP-based target price cut to INR251
We have reduced our valuation for JLR to INR172 (from INR248) on
lowering our margin estimate to 14.1% for FY13 (from 17.7%). We value
the standalone business at INR56.5 (7x FY14F EV/EBITDA).
Balanced risk-reward
We expect a weaker outlook for JLR margins going forward relative to our earlier
expectations, due to a deteriorating product mix, higher marketing expenses and lowerthan-
expected benefits of operating leverage. Post the recent stock price correction, the
risk-reward appears balanced, in our view. Looking ahead, strong luxury car industry
volume growth and success of new launches for JLR could be positive catalysts.
Potential negative catalysts include global slowdown, growth moderation in China and a
sharper-than-expected decline in domestic MHCV volumes.
JLR – cutting earnings estimates as we build in lower
margins
JLR’s margins declined by 240bps q-q to14.6% in 4QFY12, despite a higher China mix
and the potential benefits of operating leverage. This was much lower than our estimate
of 19%. We believe that operating leverage benefits did not come across as we had
expected. Per the company, the sequential decline in margins was largely due to
• lower ASPs (down 2.7% q-q), resulting from a weaker product mix;
• front-ending of employee costs, due to additional shifts at the Halewood and Solihull
plants; and
• higher marketing expenses.
We expect a much weaker outlook for JLR margins going forward relative to our earlier
expectations. We believe that product mix will remain weak, due to 1) greater volumes of
the lower-margin Freelander; 2) the negative impact on Range Rover volumes in
1HFY13, due to new product launch in 3QFY13; and 3) increased mix for the Evoque,
which may worsen further as volumes stabilize and availability improves. Further, we see
a possibility that expenditure towards brand building will remain at the elevated levels
exhibited in 4QFY12, which does not bode well for margins.
Consequently, we have reduced our EBITDA margin forecasts to 14.1% for FY13 (from
17.7%) and 14.5% for FY14 (from 18%). We maintain our volume growth estimates but
have reduced our ASP assumptions marginally to build in a weaker product mix. We
have increased our FY13-14 capex assumption to GBP2bn pa (from GBP1.7bn pa) to
factor in company guidance of increased expenditure on R&D and capacity expansion.
Overall, we have cut our earnings estimates by around 22% for FY13-14.
Standalone business – cutting volume estimates for MHCVs
While we were expecting a slowdown in MHCV volumes for FY13, volumes have already
slowed rather sharply over the past two months. MHCV volumes for TTMT were down by
30% y-y in April 2012 and 20% y-y in May 2012. We believe that part of the slowdown
was due to a combination of increase in excise duties, price hikes and pre-buying in Feb-
Mar 2012. Therefore, we expect some improvement in volume growth from current
levels. However, management’s growth target of 8% for FY13 will be difficult to achieve,
in our view. We have reduced our volume growth estimate for MHCVs to a 5% decline
for FY13 from zero growth earlier.
We have marginally increased our EBITDA margin estimate (30-40bps) for FY13-14 to
account for the lower-than-expected staff costs and other expenses in the passenger
vehicle business achieved in 4QFY12. We now build in EBITDA margins of 7.2% for
FY13 and 7.6% for FY14. Overall, our standalone earnings estimates are largely
unchanged.
Downgrade to Neutral; TP reduced to INR251
We have reduced our TP to INR251 (from INR329) on our earnings revisions for JLR.
We have used a GBP/INR rate of 86 (unchanged) for our valuations and earnings
purpose, which is largely in line with current rates and expectations of our FX team. Our
valuation of the standalone business remains largely unchanged.
Our 12-month target price of INR251 for Tata Motors is based on a sum-of-the-parts
methodology (unchanged). We value the standalone business at INR56.5/sh, based on
7.0x FY14F standalone EBITDA of INR47,329mn. We value JLR at INR172/sh, based
on 3.0x FY14F normalised EBITDA of INR175,170mn. We value other investments at
INR22.9/sh.
Key positive catalysts
1. Luxury car industry still growing at a robust pace
Luxury car players have reported robust volume growth in most key markets over the
past few months. In May 2012, volumes rose by 13% in the United States and by 29% in
China. Europe and UK volumes were up by 2% and 15%, respectively, despite a
slowdown in the broader car markets. Stronger growth in China (compared with other
markets) should improve volume mix in favour of China, which will be a positive for
industry margins as well, in our view.
2. Steady increase in luxury car market share for JLR
JLR recorded a steady increase in its luxury car market share from 5.5% to 8.0% over
2QCY10-1QCY12, per our calculations. In particular, the company has fared very well in
China, increasing its market share by around 300bps over the past year. Further, over
the past year, market share has increased across other geographies as well. This largely
has been driven by the success of the Evoque, in our view.
In March 2012, JLR announced a JV with Cherry Group in China to set up a local
manufacturing unit in China; however, government approvals are pending. This, we
believe, will help JLR to cut import duties and thus address a much larger segment. We
expect the JV could become operational in FY14, which might help JLR to further
augment its market share in China.
3. Success of new launches could lead to stronger-than-expected volume growth
We have not built in additional volumes from the small Jaguar (Jag XE), which is
expected to be launched in 2014. The small Jaguar will likely compete with existing
models such as the Audi A4, BMW 3 Series and Mercedes C class, which have a
combined market volume of around 1.1mn vehicles currently, per our estimates. The
company’s current Jaguar XF model, which competes with the Audi A6, BMW 5 Series
and Mercedes E-class, has a market share of 3.5-4.0%, according to our calculations. If
JLR can achieve similar market share for the new smaller Jaguar, volumes of the Jag XE
could reach around 40,000 units, on our estimates. This would likely create upside risk to
our volume growth estimate of around 60,000 units (up 5% y-y) for Jaguar in FY14.
Further, JLR plans to launch all-new Range Rover and Range Rover Sport models in
CY12-13; these new models will be based on 100% aluminium platforms, with premium
lightweight architecture (PLA). However, we have not factored any potential significant
increases in volume from these models in our estimates.
Risks that balance the rewards
1. Competition could heat up, particularly in the United States, and lead to higher
incentives
Retail volumes for JLR in the United States have slowed considerably over the past two
months, with volumes up only 3-8% in April-May 2012 compared with 28-32% growth in
January-March 2012. This is possibly due to increased competition between BMW and
Mercedes to rank as the No. 1 seller in the United States.
There was a sharp increase in incentives offered by Jaguar in May 2012. However,
incentives for Land Rover are very low relative to historical levels. If competition intensifies
further, this could lead to higher incentives and thus lower JLR margins.
2. Developed markets still account for around 60% of volumes – global slowdown
a key risk
Developed markets such as North America, Europe and the United Kingdom still account
for around 60% of JLR volumes. Therefore, risks from global slowdown are quite high,
which could lead to lower-than-expected volume growth and margins.
3. Slowdown in China could affect volume growth and margins
China has been a strong volume growth driver for JLR. China volumes jumped by more
than 100% y-y in FY12. The growth has remained strong in the past few months. We
therefore build in around 50% volume growth for JLR in China for FY13.
Per our China auto analyst, there are signs of volume growth and pricing pressure in the
luxury car segment over the past few months, but demand for SUVs remains strong.
Thus, any slowdown in the SUV segment could create downside risk to our estimates
Key risks
Downside risks
Global growth slowdown: Our base-case scenario assumes slow and steady GDP
growth in Europe and the United States. If either economic growth in developed
economies is weaker than expected or economies slip into recession, there could be
significant downside risks to our earnings estimates.
Slower-than-expected growth in China: Slower-than-expected growth in China
volumes could lead to downside risks to our earnings estimates.
Sharper-than-expected slowdown in MHCV industry volumes: If MHCV industry
volumes slow more sharply than our expectation of flat volumes in FY13, there could be
downside risks to our estimates.
Upside risks
Success of new launches: There are quite a few new launches planned over the next
two to three years. We have not factored any significant increases in volumes from these
models in our estimates. If the models are successful, there could be upside risks to our
estimates.
Favourable currency movements: JLR is a net importer of raw materials from Europe,
and therefore, it gains if the euro depreciates vis-à-vis the GBP. Similarly, due to
exports, JLR gains if the CNY and USD appreciate against the GBP. There could be
upside risks to our margin estimates if either the euro depreciates or the USD/CNY
appreciates against the GBP.
Consolidated EPS estimates cut by around 20% for FY13-14
We have reduced our consolidated EPS estimates by around 20% for FY13-14, mainly
on our lowered earnings estimates for the JLR business.
Our FY13-14 consolidated EPS estimates are around 14% below consensus. We
believe that consensus is not yet factoring in our expectations of weaker JLR margins.
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