Goldman Sachs, Asia: Conviction List Update - Tata Motors, Bajaj

Asia: Conviction List Update
Equity Research
Our best stock ideas in Asia
Add Trade Me, TMSC and Tata Motors; Remove Bajaj Auto
Trade Me: On July 23, we added Neutral rated Trade Me to our ANZ
Conviction List (ANZ CL) given the company’s structural migration to
online media from print classified businesses; solid 2H13 growth; and
undemanding valuations.
TMSC: On July 24, we added the stock to our Asia ex-Japan Conviction
List (AEJ CL) as we believe its recent share price correction is overdone.
We expect higher capex, new launches, and a cyclical recovery to underpin
share price performance.
Tata Motors: On July 29, we added the stock to our AEJ CL on the back of
a strong upcoming multi-year product cycle, which could drive solid
earnings expansion.
Bajaj Auto: On July 29, we removed Bajaj Auto from the AEJ CL as we
replaced the stock with Tata Motors.
CL performance
For the period between July 22 and July 29, AEJ CL generated -0.2% alpha
hedged with MSCI AEJ and currently consists of 44 stocks; the Japan CL
generated +1.8% alpha hedged with TOPIX and consists of 16 stocks; the
ANZ CL generated -0.4% alpha hedged with ASX200 Accumulation Index
and consists of 14 stocks.
Director of Research (DOR) Asia Focus List
For the period between July 22 and July 29, Focus List alpha hedged with
the MSCI Asia Pacific index was +2.0% (ytd: -13.8%). There were no
changes during the periods.
Our Focus List consists of the following 8 Buy-rated CL stocks:
AIA Group, Anhui Conch (H), China Eastern Airlines (H), HCL Technologies,
Hyundai Development, Lonking Holdings, Ping An (A), and Sumitomo
Mitsui Financial Group.

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Tata Motors (TTMT IN, Buy, on Conviction List)
Source of opportunity
We add Tata Motors to our Conviction Buy List with a revised 12-m target
price of Rs368. We believe JLR is in a decisive phase of its multi-year product
cycle, as its average model age converges with European rivals over FY14EFY15E (currently 40% older), and its strongest brands get repositioned on an
innovative new aluminum platform. Our recent visit to its plants further
reinforced our view of a company which is rapidly transforming its operations
to support the step up in its product cycle. We revise our FY14E-FY16E EPS by
-6% to +2% (mainly driven by weakness in India earnings) and are about 20%
above Bloomberg consensus on FY14E-FY15E EPS.
Catalyst
We see three key catalysts – 1) Improving market confidence on cash flow and
EBIT margin sustainability over the next few quarters, as JLR reaps the
benefits of new models and an improving mix. We forecast consolidated PBT
to see a 30% CAGR over FY13-FY15E. 2) New product introductions or
announcements over next 12 months, such as new aluminum Discovery and
new variants of Range Rover and Evoque. 3) Significant phase of annual
product restocking in 2HFY14E, with improving deliveries to key markets such
UK and China, with the ramp-up in new Range Rover Sport.
Valuation
We raise our 12-m SOTP-based target price to Rs368 (from Rs361) based on
revised earnings and rolling forward to FY15E. Tata Motors is trading at over
20% discount to global peers on Director’s Cut, and appears to be close to the
historical trough on BMW’s EV/DACF trading range. We also believe that the
current stock price arguably reflects the worst case for the parent India
business. Further, we note that its DVRs are currently trading at 48% discount
to the common stock.
Key risks
1) Higher cyclical pressure on the Indian truck demand front; 2) Higher fixed
costs from product launches; and 3) Stricter environmental regulations.


Bajaj (BJAUT IN, Buy, off Conviction List)
What happened
We maintain our Buy rating on Bajaj Auto and continue to remain positive on
company fundamentals. However, we remove the stock from our conviction
list and replace it with Tata Motors where we see higher relative upside on
account of the strong product cycle at JLR (currently at its inflection point).
Since we placed Bajaj Auto on our conviction list on Feb 15 2012, the stock is
up 14.7% vs. Sensex/BSE Auto Index up 8.8%/10.3% respectively.
Current view
Structurally, we remain positive on the global 2-wheeler space, due to
relatively consolidated nature of the industry, and growing base of consumers
at the bottom of the global economic pyramid. (See India Auto:
Deconstructing the 2-wheeler value creation engine; Buy Bajaj Auto, Feb. 15
2012. However, we cut our FY14E-16E EPS estimates by 9% to 14% on
account of the weak domestic 2-wheeler demand outlook given the backdrop
of continued weak consumer sentiment due to persistently high inflation
(especially CPI) and interest rates in the economy. We now see flattish 2-
wheeler domestic demand growth forecast for FY14 vs. prior assumptions of
11% growth with pick up in FY15/16 to 14%/12%.
We continue to maintain our positive stance on Bajaj Auto and maintain our
Buy rating as we still prefer the relatively more defensive 2-wheeler segment
when compared to rate sensitive pockets like passenger cars and trucks. Bajaj
Auto continues to deliver top quartile CROCI and industry leading EBITDA
margins on account of: 1) premium segment exposure in 2Ws, 2) first mover
advantage in exports, 3) FX benefits on account of INR depreciation as 33% of
its sales (in FY13) is derived from exports, and 4) exposure to higher margin
3-wheeler segment expected to get boost in the near term especially in
domestic markets with sanction of new permits in Hyderabad (~20K) and
Maharashtra (~30K). The stock is also on the GS SUSTAIN Focus List. Our cut
to EPS estimates are driven by sluggish domestic 2W demand but we still
remain positive on export growth outlook both for 2Ws and 3Ws. We raise
our 12-month P/E-based target price by 6% to Rs2,390 from Rs2,260 as we roll
forward to FY15E based target price. We now assign a higher target multiple
of 16.5X vs. prior 16X due to improved export growth and margin outlook as
well as relatively defensive nature of Bajaj Auto’s earnings, in our view.
Risks: 1) Longer-than-expected resolution of ongoing labor strike at Chakan
plant and any potential spill-over to other plants leading to loss of retail sales
and market share, 2) better-than-expected success of competitors such as
Honda and Yamaha, 3) higher raw material costs, 4) lower demand in India or
overseas markets, and 5) lower-than-expected consumer confidence.