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UBS Investment Research
Tata Motors Ltd.
Q 1FY12: Outlook remains tough
�� Event: Q1FY12 Results highlight margin pressure
While Sales was 5% ahead of UBS-e, EBITDA was only 3% ahead of UBS-e and
PAT was below UBS-e. EBITDA margins in India business at 8.4% (down 40bps
qoq) were lower than UBS-e of 9%. JLR EBITDA margin was also lower at 15.1%
(down 70bps qoq, UBS-e: 15.8%). JLR margins were weak despite a 6%qoq rise in
ASP driven by higher China and better model mix. India business also saw RM
cost decline by 260bps qoq but was negated by sharp increase in other expenses.
�� Impact: Maintain estimates, margins to remain under pressure
Mgmt. expects margin pressure in India business as focus remains on marketing
and promotions to improve sales rather than cut back on costs. At JLR, also mgmt.
expects margins to have a downward bias due to introduction of Evoque, potential
currency and commodity price impact offsetting benefits from operating leverage
and cost reduction effort.
�� Action: Maintain Sell, Volume growth outlook remains weak
We continue to remain cautious on volume growth outlook for JLR (Jul’11 retail
sales up 8%YoY) and well as on the MHCV growth in India. We expect EBITDA
margin at JLR to remain under pressure, as we believe operating leverage effect
has largely been played out and incentives will increase. We believe declining
domestic car sales will continue to pull down domestic margins.
�� Valuation: Maintain Sell, PT Rs 920
We value the domestic business (and other subs) at 8x FY13 EV/EBITDA and JLR
at 4x FY13 EV/EBITDA. We adjust our EBITDA for R&D capitalization.
Key takeaways from conference call
Jaguar Land Rover
�� Mgmt. is positive on China growth and expect sales vols. of 40k in FY12
(27k in FY11). In the US, inventory adjustment led to Jaguar wholesale vols.
lower than retail. Mgmt. guides wholesale volumes to be in line with retail
sales going fwd.
�� Evoque response has been strong with 18k bookings. Evoque sales may
cause margin dilution; mgt. will try to offset the impact through operating
leverage. However margins may come under pressure.
�� July retail sales are up 8% yoy at 19.8k units; Land Rover is up 16% to 15.6k
units while Jaguar is down 15% yoy to 4.2k units.
�� In US & UK, incentive levels continue to remain at a high level for Jaguar as
the co. seeks to clear stock. Incentives for Land Rover are substantially lower.
�� JLR Q1FY12 results were negatively impacted by unfavourable exchange
movement with avg. GBP/USD rate at 1.63 vs. 1.50 in Q1FY11. It was
majorly responsible for sharp rise in RM cost. The overall negative impact
on profits was GBP 50m offset by ~GBP 20m of hedging benefit. The
revaluation of assets and liabilities had adverse impact of GBP 30m.
�� Interest expense in Q1FY12 was higher due to one time prepayment charge
of GBP 20m as co. used the bond proceeds to pay off higher interest debt.
Interest expense also included one time cost of bond issuance.
�� Mgmt. guides that capex including product development expense would
continue to be high at ~13-14% of sales over the next couple of years.
Domestic business
�� Mgt. will focus on arresting decline in PV market share by intensifying their
marketing efforts including addition of workforce and broadening dealer
network to include smaller towns.
�� Mgmt. guides that other expenses in the standalone operations will continue
to be at elevated levels due to inflationary environment and increase
marketing effort. In addition, staff cost will rise with wage increases. Mgmt.
expects further pressure on domestic margins.
�� In domestic market, co. has raised prices by about 2.5% for trucks in
Q1FY12 and ~2% for cars and UVs.
�� According to mgt., credit availability remains strong for CV financing; high
interest rates is a concerning factor. Freight rates have remained flat.
Debt and capex
�� Net debt for the co. stood at ~Rs.145bn excluding financing book; of which
standalone net debt is Rs.137bn.
�� Capex for the quarter was Rs.6bn at the standalone level and GBP 370m at
JLR.
�� Tata Motors Ltd.
Tata Motors manufactures and sells commercial vehicles, utility vehicles, and
passenger cars in India. Tata Motors is the dominant player in the Indian
commercial vehicles space, with close to a 60% market share in both the
medium and heavy commercial vehicle markets in India as well as light
commercial vehicles. Tata Motors entered the passenger car market in 1998 with
the Indica model. In 2003, it released the mid-size sedan, Indigo, followed by
the Nano in 2009. In June 2008, Tata Motors acquired Jaguar and Land Rover
from Ford. The Tata Group owns 35% of Tata Motors.
�� Statement of Risk
Key risks for Tata Motors remain slowdown in CV demand in India, decline in
sales of Jaguar and Land Rover and inability to refinance debt on account of
acquisitions. Decline in demand for company's cars and LCV's remain the other
key risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tata Motors Ltd.
Q 1FY12: Outlook remains tough
�� Event: Q1FY12 Results highlight margin pressure
While Sales was 5% ahead of UBS-e, EBITDA was only 3% ahead of UBS-e and
PAT was below UBS-e. EBITDA margins in India business at 8.4% (down 40bps
qoq) were lower than UBS-e of 9%. JLR EBITDA margin was also lower at 15.1%
(down 70bps qoq, UBS-e: 15.8%). JLR margins were weak despite a 6%qoq rise in
ASP driven by higher China and better model mix. India business also saw RM
cost decline by 260bps qoq but was negated by sharp increase in other expenses.
�� Impact: Maintain estimates, margins to remain under pressure
Mgmt. expects margin pressure in India business as focus remains on marketing
and promotions to improve sales rather than cut back on costs. At JLR, also mgmt.
expects margins to have a downward bias due to introduction of Evoque, potential
currency and commodity price impact offsetting benefits from operating leverage
and cost reduction effort.
�� Action: Maintain Sell, Volume growth outlook remains weak
We continue to remain cautious on volume growth outlook for JLR (Jul’11 retail
sales up 8%YoY) and well as on the MHCV growth in India. We expect EBITDA
margin at JLR to remain under pressure, as we believe operating leverage effect
has largely been played out and incentives will increase. We believe declining
domestic car sales will continue to pull down domestic margins.
�� Valuation: Maintain Sell, PT Rs 920
We value the domestic business (and other subs) at 8x FY13 EV/EBITDA and JLR
at 4x FY13 EV/EBITDA. We adjust our EBITDA for R&D capitalization.
Key takeaways from conference call
Jaguar Land Rover
�� Mgmt. is positive on China growth and expect sales vols. of 40k in FY12
(27k in FY11). In the US, inventory adjustment led to Jaguar wholesale vols.
lower than retail. Mgmt. guides wholesale volumes to be in line with retail
sales going fwd.
�� Evoque response has been strong with 18k bookings. Evoque sales may
cause margin dilution; mgt. will try to offset the impact through operating
leverage. However margins may come under pressure.
�� July retail sales are up 8% yoy at 19.8k units; Land Rover is up 16% to 15.6k
units while Jaguar is down 15% yoy to 4.2k units.
�� In US & UK, incentive levels continue to remain at a high level for Jaguar as
the co. seeks to clear stock. Incentives for Land Rover are substantially lower.
�� JLR Q1FY12 results were negatively impacted by unfavourable exchange
movement with avg. GBP/USD rate at 1.63 vs. 1.50 in Q1FY11. It was
majorly responsible for sharp rise in RM cost. The overall negative impact
on profits was GBP 50m offset by ~GBP 20m of hedging benefit. The
revaluation of assets and liabilities had adverse impact of GBP 30m.
�� Interest expense in Q1FY12 was higher due to one time prepayment charge
of GBP 20m as co. used the bond proceeds to pay off higher interest debt.
Interest expense also included one time cost of bond issuance.
�� Mgmt. guides that capex including product development expense would
continue to be high at ~13-14% of sales over the next couple of years.
Domestic business
�� Mgt. will focus on arresting decline in PV market share by intensifying their
marketing efforts including addition of workforce and broadening dealer
network to include smaller towns.
�� Mgmt. guides that other expenses in the standalone operations will continue
to be at elevated levels due to inflationary environment and increase
marketing effort. In addition, staff cost will rise with wage increases. Mgmt.
expects further pressure on domestic margins.
�� In domestic market, co. has raised prices by about 2.5% for trucks in
Q1FY12 and ~2% for cars and UVs.
�� According to mgt., credit availability remains strong for CV financing; high
interest rates is a concerning factor. Freight rates have remained flat.
Debt and capex
�� Net debt for the co. stood at ~Rs.145bn excluding financing book; of which
standalone net debt is Rs.137bn.
�� Capex for the quarter was Rs.6bn at the standalone level and GBP 370m at
JLR.
�� Tata Motors Ltd.
Tata Motors manufactures and sells commercial vehicles, utility vehicles, and
passenger cars in India. Tata Motors is the dominant player in the Indian
commercial vehicles space, with close to a 60% market share in both the
medium and heavy commercial vehicle markets in India as well as light
commercial vehicles. Tata Motors entered the passenger car market in 1998 with
the Indica model. In 2003, it released the mid-size sedan, Indigo, followed by
the Nano in 2009. In June 2008, Tata Motors acquired Jaguar and Land Rover
from Ford. The Tata Group owns 35% of Tata Motors.
�� Statement of Risk
Key risks for Tata Motors remain slowdown in CV demand in India, decline in
sales of Jaguar and Land Rover and inability to refinance debt on account of
acquisitions. Decline in demand for company's cars and LCV's remain the other
key risk.
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