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JLR would aid growth but India business to drive free cashflow
This note is a comprehensive annual report analysis of Tata Motors and all its key
subsidiaries including Jaguar LandRover. We conclude that a) Chinese sales are
crucial for JLR as gross margin/unit is 3x company average b) Land Rover (EBITDA
margin 17-18%) remains more profitable than Jaguar (4-5%) c) JLR’s turnaround
masked the underperformance of India business d) TAMO’s net-debt/equity
(0.67x) is due to negative free cashflow in India-based business. Key metrics to
watch: JLR volume growth and India business FCF. Maintain Buy (target Rs175).
We are 18% below consensus on our FY13E EPS
We are reducing FY12E/13E EPS estimates by 28%/ 36% and target price by
29%. The reduction is primarily driven by JLR, where we have reduced EBIT by
36% and margins by 360bps to reflect the impact of the weak macro
environment. We believe our estimates reflect conservative volume and margin
assumptions. It would be crucial for JLR to sustain current levels of cashflow to
fund its scaled-up capex and R&D program in the uncertain macro environment.
JLR – a successful acquisition on most counts
TAMO’s capital raising since the acquisition through equity (Rs91bn) and FCCN
(Rs18bn) has precipitated a 50% equity dilution and it largely equals its purchase
consideration (Rs108bn). JLR’s sustainable profits (Rs42-56bn) are likely to be
higher than TAMO’s legacy business (Rs17-18bn) making the acquisition EPS
accretive. JLR’s cumulative funding gap since its acquisition (Rs9.9bn) is
significantly less than that of the legacy business (Rs54bn). However, its FY11 FCF
(Rs55bn) and ROCE (39%) is a cyclical high which we believe will trend down.
Trading at 3.2xFY13E EV/EBITDA; three-year EBITDA CAGR (FY11-14E) at 9%
Our target price of Rs175/share is based on sum-of-the-parts: 1) Rs94/share for
the India-based business valued at 7xFY13E EV/EBITDA; 2) Rs66/share for JLR
valued at 2xFY13E EV/EBITDA; 3) Rs15/share for the vehicle financing business.
Risks are demand slowdown for JLR (especially China) and a sharper-thanexpected
fall in CV volumes in India
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JLR would aid growth but India business to drive free cashflow
This note is a comprehensive annual report analysis of Tata Motors and all its key
subsidiaries including Jaguar LandRover. We conclude that a) Chinese sales are
crucial for JLR as gross margin/unit is 3x company average b) Land Rover (EBITDA
margin 17-18%) remains more profitable than Jaguar (4-5%) c) JLR’s turnaround
masked the underperformance of India business d) TAMO’s net-debt/equity
(0.67x) is due to negative free cashflow in India-based business. Key metrics to
watch: JLR volume growth and India business FCF. Maintain Buy (target Rs175).
We are 18% below consensus on our FY13E EPS
We are reducing FY12E/13E EPS estimates by 28%/ 36% and target price by
29%. The reduction is primarily driven by JLR, where we have reduced EBIT by
36% and margins by 360bps to reflect the impact of the weak macro
environment. We believe our estimates reflect conservative volume and margin
assumptions. It would be crucial for JLR to sustain current levels of cashflow to
fund its scaled-up capex and R&D program in the uncertain macro environment.
JLR – a successful acquisition on most counts
TAMO’s capital raising since the acquisition through equity (Rs91bn) and FCCN
(Rs18bn) has precipitated a 50% equity dilution and it largely equals its purchase
consideration (Rs108bn). JLR’s sustainable profits (Rs42-56bn) are likely to be
higher than TAMO’s legacy business (Rs17-18bn) making the acquisition EPS
accretive. JLR’s cumulative funding gap since its acquisition (Rs9.9bn) is
significantly less than that of the legacy business (Rs54bn). However, its FY11 FCF
(Rs55bn) and ROCE (39%) is a cyclical high which we believe will trend down.
Trading at 3.2xFY13E EV/EBITDA; three-year EBITDA CAGR (FY11-14E) at 9%
Our target price of Rs175/share is based on sum-of-the-parts: 1) Rs94/share for
the India-based business valued at 7xFY13E EV/EBITDA; 2) Rs66/share for JLR
valued at 2xFY13E EV/EBITDA; 3) Rs15/share for the vehicle financing business.
Risks are demand slowdown for JLR (especially China) and a sharper-thanexpected
fall in CV volumes in India
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