Buy
Tata Motors (TAMO.BO)
Return Potential: 27% Equity Research
JLR’s product cycle roars towards inflection; add to Conviction List
Source of opportunity
We add Tata Motors to our Conviction Buy List with a revised 12-m TP 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 FY14E-FY15E
(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 FY14EFY16E 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 TP 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.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
��
Tata Motors (TAMO.BO)
Return Potential: 27% Equity Research
JLR’s product cycle roars towards inflection; add to Conviction List
Source of opportunity
We add Tata Motors to our Conviction Buy List with a revised 12-m TP 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 FY14E-FY15E
(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 FY14EFY16E 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 TP 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.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
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