Ramp-up of new Range Rover delayed-Tata Motors: MOST

Ramp-up of new Range Rover delayed, but FY13 guidance intact
Cutting EPS estimates and target price; maintain Buy
We met the management of Tata Motors. Key takeaways:
 Ramp-up of new Range Rover (RR) slower than anticipated due to production issues;
expects production ramp-up from December 2012 and maintains FY13 guidance.
 New RR to be accretive at both the EBITDA and PAT level; multiple margin levers exist
in the form of modular platform strategy, captive engine and Chery JV.
 India business outlook challenging (except LCVs) – no catalyst visible in the near future.
 Expects to be zero-debt in the next two years, despite meaningful capex.

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Maintains FY13 volume outlook, despite slower ramp-up of new RR
Tata Motors maintains JLR volume guidance at ~360,000 units for FY13, with
~100,000 units of Evoque and 5-7% growth in non-Evoque portfolio. The recent
disappointment in JLR monthly volumes has been largely due to slower than
anticipated ramp-up of the new RR, resulting in production loss of ~20,000 units
since August. The company expects production to ramp up from December.
Multiple margin levers for JLR over the next 2-3 years
JLR has multiple levers to improve its sustainable margins over the next 2-3
years. The new RR would be accretive at both the EBITDA and PAT levels – the
benefits would be fully reflected in FY14. As it fully executes its modular platform
strategy – two models per platform by 2016 from 1.28x currently, sustainable
margins would expand by 150-200bp. Further, over the next 2-3 years, its captive
engine initiative and Chery JV (China) would help reduce costs.
India business to remain under pressure in the short term
India business continues to be under pressure (except LCVs). While there are no
visible signs of improvement for MHCVs, discounts have reduced MoM since
September 2012. LCV growth remains robust, with no major threat to margins
over the near to medium term. The domestic passenger car business continues
to struggle, with lower capacity utilization, higher discounts and ad spends.
Balance sheet deleveraging despite significant capex in both businesses
JLR’s current elevated investment program aimed at filling product gaps is likely
to continue till FY15; it expects to remain FCF positive even during this investment
phase. Capex would fall in line with its peers to 10-12% of sales post FY15 as
against 13-14% till FY15. However, Tata Motors expects to be a zero-debt company
in the next two years, barring any significant pressure on either business.
Downgrading EPS, target price; maintain Buy
We are cutting our EPS estimates for FY13/FY14 by 2%/3.4% to INR32.5/INR39.3,
building in slower ramp-up of the new RR and continued weakness in the domestic
business. However, the impact is diluted by lower than expected depreciation
and amortization on the new RR. The stock trades at 8.5x FY13E and 7.0x FY14E
consolidated EPS. Maintain Buy with a revised target price of INR325 (FY14 SOTP)
– 20% upside.