Tata Motors Ltd.
Think Indian, Buy global:
Upgrading from Neutral to Buy
Raising PO to Rs360
We upgrade Tata Motors from Neutral to Buy and raise our PO by 26% to Rs360.
This is solely driven by JLR, reflected in (1) increase in profit forecasts by 15-25%
on better sales mix, and (2) consequent re-rating to 4x EV/EBITDA (from 3.3x),
implying 20% growth premium (30% EBITDA CAGR) to global peers (10%
CAGR). We retain Buy on Class A shares (XTXMF) with our PO raised to Rs234.
JLR: Global transformation underway
Despite falling short of expectations in 1H (161,000 units), we expect JLR (80% of
cons EBITDA) to meet full-year sales expectations of 363,000 units (+15.5%) and
also sustain momentum over the forecast period. This will be driven by a slew of
products with far more market potential and improved pricing than anticipated
earlier. We therefore raise our profit estimates by 15-25% over FY14-15.
India business: Amidst downturn but closer to trough
Although the near-term outlook seems uncertain, prompting a sharp cut in core
profit forecasts, M/HCV (i.e. truck/bus) which is the key contributor could be closer
to trough, in our view. LCV is growing ahead of peers and Utility vehicle (UV) is
piggy-backing on structural uptrend. Cars, the often-repeated weak business link,
may not recover but lowered expectations are already built into forecasts.
Despite outperformance, key pick in autos
Despite stock outperformance, we justify a Buy rating now because deliverables
seem sustainable (profits, cash flows) and valuations still attractive. Risks include
global economic slowdown, pricing and currency fluctuations impacting JLR
profitability and delayed cyclical recovery in India, currently assumed for FY15.
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