Tata Motors: Slowdown Concerns Overdone; OW --Morgan Stanley Research,

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Tata Motors
Slowdown Concerns
Overdone; OW
What's Changed
Price Target  Rs1,324.00 to Rs974.00
F12/F13 Consol EPS  By -30%/-29%
We lower our earnings estimates to reflect a
potential demand slowdown but MS economists do
not expect a prolonged developed world recession.
At current levels, the stock is pricing in sharp de-
growth in earnings for JLR, which, in our view, is a
low probability; thus the risk-reward looks favorable
at current levels. We remain Overweight.
•Given low visibility, we are building conservative
assumptions: We broadly maintain our earnings for
India business but cut JLR’s earnings to reflect the
deteriorating global macro environment. We expect JLR
to do 273k units in FY12, 12% growth. We cut JLR
earnings by 40% over FY12/13 and lower our target
multiple to reflect recent de-rating across EU OEMs.
•Looking across scenarios, we see that TTMT is a high
risk/reward play. At current levels, upside to our, base
case is 32%, bull case upside is 63%, while 23%
downside to our bear case, in a way, implies the market is
implying low probability to our bull case.
•Upcoming catalysts: JLR is launching a new SUV
“Evoque” and “XF” facelift in the coming quarter; thus
volume momentum should improve.
•Pricing in recession: Assuming base case value for
TTMT India and subsidiaries then the current price
implies that JLR trades at 20% EV/Sales, close to 2008
levels for EU luxury OEMs.
•2008 vs 2011, TTMT is better placed this time: The
net auto D/E is 0.7x and interest to EBITDA ratio is 12%
for FY11; thus from a balance sheet perspective, the
company looks well placed