Tata Motors- Cautious on JLR, downgrade to Neutral :UBS

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UBS Investment Research
Tata Motors Ltd.
Cautious on JLR, downgrade to Neutral
􀂄 Downgrade from Buy to an anti-consensus Neutral rating
We downgrade Tata Motors to a Neutral rating despite our positive view on the
domestic commercial vehicle (CV) cycle, as we believe Jaguar Land Rover’s (JLR)
margins could disappoint due to: 1) unfavourable FX movements with the euro
appreciating and the US$ depreciating against the GBP; 2) the bottoming of
incentives; 3) potential margin pressure from rising commodity costs. We expect
JLR to contribute 57%/53% of consolidated EBITDA in FY11/12 and remain the
key driver of Tata Motors’ share price performance.
􀂄 Turning more cautious on JLR margins, uncertain volume growth
We lower our JLR EBITDA margin assumptions for FY11/12 from 14.5%/14.5%
to 14%/13%. While we expect strong 24% YoY growth for JLR’s volumes, its
sales momentum has continued to slow. Given an uncertain global economic
outlook, we assume no growth for JLR’s volumes in FY12.
􀂄 Remain bullish on domestic CV growth; PV continues to struggle
We raise our FY11/12 forecasts for Tata Motors’ domestic CV growth, but cut our
passenger vehicle (PV) growth forecast for FY11 (excluding the Nano). We lower
our FY11/12 standalone EBITDA margin assumptions from 11.6%/11.6% to
11.3%/11% due to rising cost pressure. We are ahead of consensus on standalone
earnings for FY11/12 by 1%/11%, but differ from consensus by 8%/-3% for its
FY12/13 consolidated EPS.
􀂄 Valuation: maintain Rs1,300.00 price target
We value Tata Motors’ domestic business and subsidiaries on a 10x 12-month
forward EBITDA and JLR on a 5x 12-month forward EBITDA (earlier multiple of
5x) to derive our price target. We adjust our EBITDA assumption for high R&D
capitalisation.