The company is sanguine about the JLR business, while in the domestic
markets, they are concerned about the MHCV segment. They foresee an
improvement in PV business and are expecting the robust performance of the
LCVs to continue going forward.
JLR demand to remain strong as China improves its share in total
volume pie
As China contributed 22% of the total volumes of JLR in Q1 FY13, the company
rubbished any slowdown impacting JLR's volumes or the questions that were
raised by the industry regarding the discounts. They mentioned that they are
currently away from the discount race in China, however they are giving small
discounts on V6 and V8 versions of Range Rover as they have to clear off the
inventory with the new model of Range Rover getting launched by Diwali. They
have 2% market share in China and are a small player to give any discounts
there. The Chinese markets are still offering good demand to JLR models
particularly Evoque despite the demand for the biggies like BMW, Audi, Daimler
etc have shown weakening signs. The Chery deal may commence at any time,
depending on the regulatory approvals. This JV will be having an installed capacity
to produce 1,00,000 units of Evoque, Freelander and Jaguar XF later. A 7-seater
Freelander will get launched in Q4 FY 13 or Q1 FY14 and will be getting lunched
first in China following other geographies.
Evoque coupled with other new launches to drive JLR volumes
Evoque has emerged as the single largest driver of the JLR stable and sold
about 27,000 units in FY 12. It has an order book of 22,000 units and produces
and sells about 9,000-10,000 units per month. The company has hence started
its third shift at the Halewood plant where Evoque (and Freelander) are produced.
This would increase Evoque's production by ~3000 p.m. and thus cater to the
bludgeoning demand for Evoque. The new launches include Range Rover and
Range Rover Sport refreshes (Oct-Nov launch), a 7 seater Freelander as
discussed above, Jaguar F Type, Sports Brake version of XF and an F Type Sports
car based on the CX 16 platform showcased during the Delhi Auto Expo in January
2012. These new product launches will somewhat improve the product mix tilted
towards the low margin Evoque and maintain margins close to 14-14.5%, says
the management. In the US and China, ~70% vehicles function on All Wheel Drive
Type, while Jaguar functions on 4 wheel drive type. The new launches to happen
in these two countries will be on the All Wheel Drive Type, fitted with a smaller 2.2L
or 2 L engine down from the traditional 3 L engine as demand is rapidly shifting
towards fuel efficient smaller engines.
European weakness continues, US stable, Brazil the shining star among
ROW countries
Among the European countries, Southern Europe comprising of Spain, Portugal and
Italy are showing maximum signs of weakness reflecting their economic woos. France
is showing moderate growth, while Germany is one of the outperformers. The
underperformance of models other than Evoque is mainly driven by Europe as customers
are postponing their demand for the high price models of the JLR stable. Additionally
customers are postponing the purchases of their V6 and V8 models of Range Rover as
their refreshes are in the pipeline and will get launched in a couple of months. The US
auto industry is still better placed as compared to Europe and JLR is performing
moderately positive over there. Among the ROW countries, Brazil, South Africa, Australia,
Russia and Middle East are the main drivers of growth. Brazil contributes maximum
(~30%) of the total ROW volumes, where LR is having ~30% market share of the SUV
industry. A recent change in the duty structure over there as resulted in some slowdown
over there; however, government's intervention on the same may improve things over
there. Russia is seeing slight slowdown due to which the contribution of Russia which
was 6% a year ago has come down to 4%
Domestic MHCV to post a negative growth this year -
Management mentioned that with 27% fall in MHCV volumes in Q1, the company has
lost market share to its peers as they have given discounts lesser than players like
Ashok Leyland and Eicher Motors. In future, if the market share loss becomes steeper,
then TAMO will be forced to increase discounts, which seems likely going forward. Also
to arrest this decline they are planning to launch 30 new products and variants in the
next 1 year. This will include a range of Prima's new variants labeled as the LX range
priced at just 10% premium to TAMO's existing products. However, for the full year FY13,
the company expects a negative growth, though they did not quantify it. In the second
half of the year, they see an improvement with expectations of bank rates getting cut and
economy seeing some recovery. As far as the competition from players like Bharat
Benz and Daimler is concerned, they said that it will be in the higher tonnage segment
only, while with TAMO's presence across the MHCV industry will not get affected too
much. The MHCV segment is currently running at 50-60% utilization rate.
LCV segment to grow close to 15% in FY 13
Management is expecting LCV business to perform well with its trump card Tata Ace
and its variants to rule the market while its new variants launches will keep competition
at bay. LCV business of Tata is functioning at a capacity utilization rate of close to 65-
70%, while SCV segment within LCV runs 100% capacity utilization driven by Ace. They
don't see any significant slowdown in the LCV segment at least in FY 13, while expecting
it to grow at 15% this year. Secondly, the Dharward capacity has commenced and is
running in its first phase wherein they are producing insignificant amount of output
currently, but has capacity of 100,000 units which would get ramped up by 50,000 if
required.
PV segment to show improvement on new launches and renewed
marketing efforts
The company admitted to the fact that the company is losing its market share due to
weak marketing efforts. Therefore, they are spending more on the advertising and
dealer network. They plan to increase the dealer network by 10-15% this year from
current 1000 touch points currently, while launching a Nano CNG variant, refreshes of
Indica Vista and Indigo Manza and an new hatchback(with an altogether new name,
free from the Indica/Indigo brand) in Q4 of the year. The additional efforts on marketing
will not pressurize margins too much as the company believes that the RM costs will
subside more in the ensuing quarters and the company will be able to better the Q1
margins of 7%. On the UV side, they see some competition building up, so they are
launching the new Safari Storme by Diwali and Sumo Gold variants post that. With the
recent launch of Nano 2012, they expect to touch a monthly run-rate of ~10,000 p.m.
units of Nano in a few months which will be also supported by the CNG variant. The PV
segment of TAMO is running at 65-70% utilization rate, driven by the increasing demand
for diesel models (>70% of TAMO's PV portfolio is diesel)
Outlook and Valuation
We remain positive on the stock and believe that the company will be able to post a
strong performance on the JLR front in the medium term despite short term headwinds
which even the management has agreed with. On the domestic front, this year will be
difficult for TAMO as MHCV segment is a proxy to the economy. Management mentioned
that the recent signs of slowdown in LCV segment is nothing to worry about and is
seasonal. A good pickup in LCV business is expected in the coming months. We
maintain a BUY rating on the stock and maintain our target price of Rs283 on the stock
(upside of 20%)
SOTP Valuation
Standalone
FY '14E EBITDA (Rs mn) 43887
EV/EBITDA multiple (x) 6
EV (Rs mn) 263322
EV/share (Rs) 83
JLR
FY '14E EBITDA (Rs mn) 200379
EV/EBITDA multiple (x) 3.5
EV (Rs mn) 701327
EV/share (Rs) 221
FY '14E Consolidated Net debt (Rs mn) 124411
Net debt/share (Rs) 39
Subsidiary value (Rs) 19
Target price (Rs) 283
CMP (Rs) 235
Upside (%) 20%
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